The forward-looking competitive firm under uncertainty
1998
Lence, S.H. | Hayes, D.J.
Under realistic circumstances, forward-looking risk-averse firms will produce more than risk-neutral firms, and a mean-preserving spread of the price distribution will increase risk-averse firms' production. These results depend on firms realizing that prices of inputs required for production in subsequent periods are contemporaneously correlated with output prices. This study rationalizes previously unexplained real-world behavior such as the spreading of sales over time and short-run production (or storage) at an expected loss. The present findings imply that empirical work should not assume, nor should it find, a monotonic relationship between output and the level of risk or of risk aversion.
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