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Choice of Technique Under Uncertainty*

Published online by Cambridge University Press:  17 August 2016

David de Meza*
Affiliation:
London School of Economics
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Extract

Recent research on the behaviour of the firm under uncertainty is so formulated that the issue of choice of technique is excluded from serious consideration. The reasons are clear. With random demand or factor prices and no input variable ex-post it follows trivially that if the firm is risk neutral its choice of technique must be the same as under mean preserving certainty. On the other hand, if, as is usual, some but not all inputs are variable ex-post the standard assumption of a putty-putty technology implies that input levels are chosen sequentially and only when the uncertainty is resolved are factor proportions determined. The question of choice of technique under uncertainty is consequently assumed away; the analysis determines only the effect of uncertainty on the quantity of the fixed factor installed. A recent analysis in this vein by Perrakis (1980) concludes that if output is not fixed ex-ante, uncertainty over the price of variable inputs will normally raise the capital stock if the firm is risk neutral although risk aversion will offset this tendency; Nickell (1977 or 1978 ch. 5) obtains essentially similar results.

Type
Research Article
Copyright
Copyright © Université catholique de Louvain, Institut de recherches économiques et sociales 1983 

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Footnotes

*

This note has benefitted from my discussions with Bob Gould, Alan Marin, Daniel Seidmann and Hugh Wills and from the comments of two anonymous referees.

References

REFERENCES

Bischoff, C. (1971), Business Investment in the 1970s: A Comparison of Models, Brookings Papers on Economic Activity, vol. 1, pp. 1363.Google Scholar
Fuss, M. and Mcfadden, D. (1978), Flexibility Versus Efficiency in Ex-ante Plant Design, Vol. 1, Production Economics Containing a Dual Approach to Theory and Application, eds. Fuss, M. and McFadden, D., North Holland, pp. 311364.Google Scholar
Nickell, S.J. (1977), The Influence of Uncertainty on Investment: Is it Important, Economic Journal, vol. 87. No. 345 pp. 4770. (March).Google Scholar
Nickell, S.J. The Investment Decisions of Firms, J. Nisbett and Cambridge University Press.Google Scholar
Perrakis, S. (1980), Factor-Price Uncertainty with Variable Proportions: Note, American Economic Review, vol. 70, No. 5, pp. 10831088, (Dec.).Google Scholar