Production theory under price uncertainty for firms with disappointment aversion

Xu Guo, Martín Egozcue and Wing-Keung Wong

International Journal of Production Research, 2021, vol. 59, issue 8, 2392-2405

Abstract: This paper studies the production theory of the competitive firm under price uncertainty by adopting four of the most well-established models of disappointment aversion. Our results show that a disappointment-averse firm will generally produce less than a risk-averse firm. Further, the disappointment-averse firm's optimal output level will surely decrease with an increase in the disappointment coefficients. Moreover, the optimal outputs among the four disappointment-averse models are not the same. As a real case example, we apply our models to determine the optimal building heights for new buildings in Punta del Este, Uruguay. In this example, our disappointment averse models' predictions are very close to the observed heights of these new projects.

Date: 2021
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DOI: 10.1080/00207543.2020.1733699

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