We develop an alternative approach to the general equilibrium analysis of a stochastic production economy when firms’ choices of investment influence the probability distributions of their output. Using a normative approach we derive the criterion that a firm should maximize to obtain a Pareto...

This article uses Taylor series expansions and the assumption of small risks to derive a comoment criterion that firms should maximize so that the resulting equilibrium is Pareto optimal. This is done in two models of production under uncertainty: the state-of-nature  <formula format="inline"> <file name="iere_599_mu1.gif" type="gif" /> </formula> model in which the...