 Regret theory and the competitive firmKit Pong Wong Economic Modelling, 2014, vol. 36, issue C, 172-175 Abstract: This paper examines the production decision of the competitive firm under uncertainty when the firm is not only risk averse but also regret averse. Regret-averse preferences are characterized by a modified utility function that includes disutility from having chosen ex-post suboptimal alternatives. The extent of regret depends on the difference between the actual profit and the maximum profit attained by making the optimal production decision had the firm observed the true realization of the random output price. If the firm is not too regret averse, we show that the conventional result that the optimal output level under uncertainty is less than that under certainty holds. Using a simple binary model wherein the random output price can take on either a low value or a high value with positive probability, we show the possibility that the firm may optimally produce more, not less, under uncertainty than under certainty, particularly when the firm is sufficiently regret averse and the low output price is very likely to prevail. Keywords: Production; Regret theory; Uncertainty (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:36:y:2014:i:c:p:172-175 DOI: 10.1016/j.econmod.2013.09.023 Access Statistics for this article Economic Modelling is currently edited by S. Hall and P. Pauly More articles in Economic Modelling from Elsevier |
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