The Forward‐Looking Competitive Firm Under Uncertainty

10 Pages Posted: 31 Mar 2020

See all articles by Sergio H. Lence

Sergio H. Lence

Iowa State University - Department of Economics

Dermot J. Hayes

Iowa State University

Date Written: May 1998

Abstract

Under realistic circumstances, forward‐looking risk‐averse firms will produce more than risk‐neutral firms, and a mean‐preserving spread of the price distribution will increase risk‐averse firms' production. These results depend on firms realizing that prices of inputs required for production in subsequent periods are contemporaneously correlated with output prices. This study rationalizes previously unexplained real‐world behavior such as the spreading of sales over time and short‐run production (or storage) at an expected loss. The present findings imply that empirical work should not assume, nor should it find, a monotonic relationship between output and the level of risk or of risk aversion.

Keywords: forward‐looking decision making, production, storage, uncertainty, D210, D810

Suggested Citation

Lence, Sergio H. and Hayes, Dermot J., The Forward‐Looking Competitive Firm Under Uncertainty (May 1998). American Journal of Agricultural Economics, Vol. 80, Issue 2, pp. 303-312, 1998, Available at SSRN: https://ssrn.com/abstract=3563766 or http://dx.doi.org/10.2307/1244503

Sergio H. Lence (Contact Author)

Iowa State University - Department of Economics ( email )

260 Heady Hall
Ames, IA 50011
United States

Dermot J. Hayes

Iowa State University

613 Wallace Road
Ames, IA 50011-2063
United States

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