Uninsurable Risks: Uncertainty in Production, the Value of Information and Price Dispersion

Ana Paula Martins

Annals of Economics and Finance, 2007, vol. 8, issue 2, 341-383

Abstract: This article digresses over the interaction of uncertainty with the firm¡¯s optimal decisions in a simple framework: a standard price-taking (short-run restricted) single-input and output unit, subject to the interaction with a zeromean Bernoulli lottery of variable dispersion. The firm is always considered an expected profit-maximizing entity. We inspect the consequences of exogenous uncertainty on the optimal allocations and on its "mean-(and)variance" valuation position. On the one hand, we contrast the effect of different sources of uncertainty on the producer¡¯s problem¡ªinput and output prices and quantities. On the other, we analyse the impact of ex-post flexibility of the decision variables. Importance and role of measures of risk-aversion (of concavity and convexity) imbedded in the firms technology ¡ª either the production, marginal productivity or the cost function, ¡ª and potentially risk-enhancing or deterrent features of the latter in the transmission of exogenous uncertainty to the optimal profits¡¯ mean and volatility under the different scenarios are highlighted.

Keywords: Uncertainty and Production; Uncertainty and Labor Demand; Firm¡¯s Valuation; Mean-Variance; Commitment under Uncertainty; Risk-aversion; Absolute Convexity; The Value of Information / Flexibility to a Firm; Statistical Discrimination (search for similar items in EconPapers)
JEL-codes: D80 J23 J24 J71 L14 L15 (search for similar items in EconPapers)
Date: 2007
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Journal Article: Uninsurable Risks: Uncertainty in Production, the Value of Information and Price Dispersion (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:cuf:journl:y:2007:v:8:i:1:p:341-383

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