Tax Asymmetry, Production and Hedging

The paper studies the effect of tax asymmetry on (risk neutral) competitive firm's production and optimal hedging behavior under price uncertainty. Assuming that the tax rate on profits is higher than the compensation rate for losses, we show that: (a) in the absence of risk sharing arrangements asymmetry in taxation lowers the firm's optimal output compared to the symmetric tax case, (b) when risk sharing tools become available the firm's output increases; moreover, in this case the 'separation property' holds, i.e., the firm's output does not depend on the tax (subsidy) rates or the distribution of the random price, (c) in a multi-period framework with hedging, if tax loss carryback and tax loss carryforward exist, the ‘separation property' holds as well, (d) in the multi-period case, the firm's output in the second period is affected by its first period's profits, the availability of hedging tools, and the tax system