Hostname: page-component-76fb5796d-vvkck Total loading time: 0 Render date: 2024-04-29T01:44:00.734Z Has data issue: false hasContentIssue false
  • English
  • Français

Production as behavior toward risk

Published online by Cambridge University Press:  17 August 2016

G.A. Hawawini  and
P.A. Michel
G.A. Hawawini
Affiliation:
INSEAD, France
P.A. Michel
Affiliation:
University of Liège
Get access

Extract

Recent contributions to the theory of the firm have recognized the impact of uncertainty on both the firm’s behavior and its equilibrium position. Models were developed by Baron (1970, 1971), Sandmo (1971) and Leland (1972) that explicitly incorporate a random output price as well as the firm’s attitude toward the risk associated with production under price uncertainty. These models assume that, in the absence of complete foresight, the firm seeks to maximize the expected utility of its profits, in contrast to the traditional profit-maximizing firm operating under certainty. It is then shown that a firm which displays aversion toward risky activities will produce a smaller output under price uncertainty than under certainty, and that, contrary to the firm operating in a certain world, the risk averse firm may alter its optimal level of production in response to a change in its fixed costs.

These and other comparative-statics results derived by Baron, Sandmo and Leland are based on the general principle of expected utility maximization, first developed by Arrow (1965) in his work on the theory of risk aversion. An alternative approach is based on the mean-standard deviation framework (M-SD hereafter) developed by Markowitz (1952, 1959) and extended by Tobin (1958, 1965).

Type
Research Article
Information
Recherches Économiques de Louvain/ Louvain Economic Review , Volume 45 , Issue 3 , September 1979 , pp. 299 - 311
Copyright
Copyright © Université catholique de Louvain, Institut de recherches économiques et sociales 1979 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Arrow, K. (1965), Aspects of the Theory of Risk-Bearing, Lecture Two, Academic Bookstore, Helsinki.Google Scholar
Baron, D. (1971), Demand Uncertainty in Imperfect Competition, International Economic Review, Vol. 12. n° 2.Google Scholar
Baron, D. (1970), Price Uncertainty, Utility, and Industry Equilibrium in Pure Competition, International Economic Review, Vol. 11, n° 3.Google Scholar
Hawawini, G. (1978), A Mean-Standard Deviation Exposition of the Theory of the Firm Under Uncertainty : A Pedagogical Note, The American Economic Review, Vol. 68, n° 1.Google Scholar
Hawawini, G. and Michel, P. (1978), Theory of the Firm Under Uncertainty: A Geometric Exposition, CREDEL Research Paper 7805, Université de Liège.Google Scholar
Leland, H. (1972), Theory of the Firm Facing Uncertain Demand, The American Economic Review, Vol. 62, n° 3.Google Scholar
Markowitz, H. (1952), Portfolio Selection, The Journal of Finance, Vol. 7, n° 1.Google Scholar
Markowitz, H. (1959), Portfolio Selection: Efficient Diversification of Investments, John Wiley & Sons, New York.Google Scholar
Pratt, J. (1964), Risk Aversion in the Small and in the Large, Econometrica, Vol. 32, n° 1–2.Google Scholar
Sandmo, A. (1971), On the Theory of the Competitive Firm Under Price Uncertainty, The American Economic Review, Vol. 61, n° 1.Google Scholar
Sengupta, S. (1967), Operations Research in Sellers’ Competition, John Wiley & Sons, New York.Google Scholar
Tobin, J. (1958), Liquidity Preference as Behavior Towards Risk, The Review of Economic Studies, Vol. 25, n° 67.Google Scholar
Tobin, J. (1965), The Theory of Portfolio Selection in The Theory of Interest Rates, ed. by Hahn, F. and Brechling, F. MacMillan, London.Google Scholar
von Neumann, J. and Morgenstern, O. (1947), Theory of Games and Economic Behavior. Princeton University Press, Princeton.Google Scholar