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Article: A Smooth Ambiguity Model of the Competitive Firm

TitleA Smooth Ambiguity Model of the Competitive Firm
Authors
Issue Date2015
PublisherJohn Wiley & Sons Ltd. The Journal's web site is located at http://www.blackwellpublishing.com/journals/BOER
Citation
Bulletin of Economic Research, 2015, v. 67, p. S97-S110 How to Cite?
AbstractThis paper examines the optimal production decision of the competitive firm under price uncertainty when the firm's preferences exhibit smooth ambiguity aversion. Ambiguity is modeled by a second-order probability distribution that captures the firm's uncertainty about which of the subjective beliefs govern the price risk. Ambiguity preferences are modeled by the (second-order) expectation of a concave transformation of the (first-order) expected utility of profit conditional on each plausible subjective distribution of the price risk. Within this framework, we derive necessary and sufficient conditions under which the ambiguity-averse firm optimally produces less in response either to the introduction of ambiguity or to greater ambiguity aversion when ambiguity prevails. In the case that the price risk is binary, we show that ambiguity and greater ambiguity aversion always adversely affect the firm's production decision.
Persistent Identifierhttp://hdl.handle.net/10722/222581

 

DC FieldValueLanguage
dc.contributor.authorWong, KP-
dc.date.accessioned2016-01-18T07:43:14Z-
dc.date.available2016-01-18T07:43:14Z-
dc.date.issued2015-
dc.identifier.citationBulletin of Economic Research, 2015, v. 67, p. S97-S110-
dc.identifier.urihttp://hdl.handle.net/10722/222581-
dc.description.abstractThis paper examines the optimal production decision of the competitive firm under price uncertainty when the firm's preferences exhibit smooth ambiguity aversion. Ambiguity is modeled by a second-order probability distribution that captures the firm's uncertainty about which of the subjective beliefs govern the price risk. Ambiguity preferences are modeled by the (second-order) expectation of a concave transformation of the (first-order) expected utility of profit conditional on each plausible subjective distribution of the price risk. Within this framework, we derive necessary and sufficient conditions under which the ambiguity-averse firm optimally produces less in response either to the introduction of ambiguity or to greater ambiguity aversion when ambiguity prevails. In the case that the price risk is binary, we show that ambiguity and greater ambiguity aversion always adversely affect the firm's production decision.-
dc.languageeng-
dc.publisherJohn Wiley & Sons Ltd. The Journal's web site is located at http://www.blackwellpublishing.com/journals/BOER-
dc.relation.ispartofBulletin of Economic Research-
dc.rightsBulletin of Economic Research. Copyright © John Wiley & Sons Ltd.-
dc.rightsThe definitive version is available at www.blackwell-synergy.com-
dc.rightsCreative Commons: Attribution 3.0 Hong Kong License-
dc.titleA Smooth Ambiguity Model of the Competitive Firm-
dc.typeArticle-
dc.identifier.emailWong, KP: kpwongc@hkucc.hku.hk-
dc.identifier.authorityWong, KP=rp01112-
dc.description.naturepostprint-
dc.identifier.doi10.1111/boer.12051-
dc.identifier.hkuros256726-
dc.identifier.volume67-
dc.identifier.spageS97-
dc.identifier.epageS110-

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