ANNALS OF ECONOMICS AND FINANCE 8-2, 341–383 (2007) 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 zero-mean 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 — input 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 con-vexity) imbedded in the firms technology — either the production, marginal productivity or the cost function, — and potentially risk-enhancing or deter-rent features of the latter in the transmission of exogenous uncertainty to the optimal profits ’ mean and volatility under the different scenarios are high-lighted