THE FORWARD-LOOKING COMPETITIVE FIRM UNDER UNCERTAINTY

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. Th ese results depend on firms realizing that prices of inputs required f or production in subsequent periods are contemporaneously correlated w ith 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 imp ly that empirical work should not assume, nor should it find, a monoto nic relationship between output and the level of risk or of risk avers ion.