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A producer theory with business risks

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Seong_Hoon_ProducerTheory_CDMA.1201.pdf (4.630Mb)
Date
01/2012
Author
Kim, Seong-Hoon
Moon, Seongman
Keywords
Uninsurable business risks
Markup
Risk premium
Hedge and offer
Price intertia
Stochastic dominance
Conditional sales ratio
HB Economic Theory
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Abstract
In this paper, we consider a producer who faces uninsurable business risks due to incomplete spanning of asset markets over stochastic goods market outcomes, and examine how the presence of the uninsurable business risks affects the producer's optimal pricing and production behaviours. Three key (inter-related) results we find are: (1) optimal prices in goods markets comprise ‘markup’ to the extent of market power and ‘premium’ by shadow price of the risks; (2) price inertia as we observe in data can be explained by a joint work of risk neutralization motive and marginal cost equalization condition; (3) the relative responsiveness of risk neutralization motive and marginal cost equalization at optimum is central to the cyclical variation of markups, providing a consistent explanation for procyclical and countercyclical movements. By these results, the proposed theory of producer leaves important implications both micro and macro, and both empirical and theoretical.
Citation
Kim , S-H & Moon , S 2012 ' A producer theory with business risks ' Centre for Dynamic Macroeconomic Analysis, Working Paper , no. 1201 , Centre for Dynamic Macroeconomic Analysis , St Andrews .
Type
Working or discussion paper
Rights
(c) The author 2012
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  • University of St Andrews Research
URL
http://www.st-andrews.ac.uk/cdma/papers.html#2012WP
URI
http://hdl.handle.net/10023/2173

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