The choice between multiplicative and additive production uncertainty

Moawia Alghalith and Ardeshir Dalal

Economic Modelling, 2009, vol. 26, issue 5, 1129-1133

Abstract: When modeling output uncertainty, the multiplicative specification is consistently chosen over the additive form, despite the latter being arguably intuitively more obvious. The rationale for this seems to be that when production risk is the only source of uncertainty, additive uncertainty does not reduce output below the certainty level, while multiplicative uncertainty does. We show that, in the absence of hedging, this result is drastically modified when there is simultaneous price and output uncertainty. In this situation the theoretical implications of the two specifications are sufficiently similar to preclude any a priori choice between the two. Thus the choice between the additive and multiplicative formulations may be dictated by how each performs in empirical analyses.

Keywords: Multiplicative; output; uncertainty; Additive; output; uncertainty; Price; uncertainty (search for similar items in EconPapers)
Date: 2009
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0264-9993(09)00077-7
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:26:y:2009:i:5:p:1129-1133

Access Statistics for this article

Economic Modelling is currently edited by S. Hall and P. Pauly

More articles in Economic Modelling from Elsevier
Bibliographic data for series maintained by Catherine Liu ().