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Optimal Output for the Regret-Averse Competitive Firm Under Price Uncertainty

Udo Broll, Martin Ergozue, Peter Welzel () and Wing-Keung Wong ()

MPRA Paper from University Library of Munich, Germany

Abstract: We study the optimal production of a competitive risk-averse firm under price uncertainty. We suppose that the firm is also regret-averse. For example, if market prices ex post turn out to be very high the firm might regret not producing more. If it turns out that the price is low the firm might regret an over-production. We find that optimal output under regret aversion might be higher than under risk aversion. We also prove that optimal production could increase or decrease when the regret-averse coefficient increases. In general, we show that the regret-avers firm tend to hedge their bets, taking into account the possibility that their decisions may turn out to be ex post not optimal. These predictions can help explain the fact the price uncertainty has not such an extreme impact than those would be derived from pure risk-averse preferences.

Keywords: Firm; decision making; price uncertainty; regret aversion; risk aversion (search for similar items in EconPapers)
JEL-codes: C02 G11 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com and nep-upt
Date: 2013-11-25
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Related works:
Journal Article: Optimal output for the regret-averse competitive firm under price uncertainty (2015) Downloads
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