Uninsurable Risks: Uncertainty in Production, the Value of Information and Price Dispersion

This article digresses over the interaction of uncertainty with the firm¡¯s optimal decisions in a simple framework: a standard price-taking (short-run restricted) single-input and output unit, subject to the interaction with a zeromean Bernoulli lottery of variable dispersion. The firm is always considered an expected profit-maximizing entity. We inspect the consequences of exogenous uncertainty on the optimal allocations and on its "mean-(and)variance" valuation position. On the one hand, we contrast the effect of different sources of uncertainty on the producer¡¯s problem¡ªinput and output prices and quantities. On the other, we analyse the impact of ex-post flexibility of the decision variables. Importance and role of measures of risk-aversion (of concavity and convexity) imbedded in the firms technology ¡ª either the production, marginal productivity or the cost function, ¡ª and potentially risk-enhancing or deterrent features of the latter in the transmission of exogenous uncertainty to the optimal profits¡¯ mean and volatility under the different scenarios are highlighted.