A Co-Moment Criterion for Firms for the Two Canonical Models of Production Under Uncertainty

26 Pages Posted: 22 Apr 2008

See all articles by Michael J. P. Magill

Michael J. P. Magill

University of Southern California - Department of Economics

Martine Quinzii

University of California, Davis - Department of Economics

Date Written: February 2008

Abstract

This paper shows that there is a common criterion for firms for the two canonical equilibrium models of production under uncertainty, the state-of-nature model and the probability model. When security markets are sufficiently rich to efficiently allocate firms' profit streams among the consumer-investors, the theoretical criterion in the state-of nature model is market-value maximization, while for the probability model it is maximization of a firm's contribution to social welfare. Both criteria however require information not readily available to firms in practice. We show that if risks are not too large then both criteria can be transformed into a common co-moment criterion which a Nash-competitive firm should maximize, taking as given the production decisions of other firms and the co-moment prices, which can be easily deduced from security prices if co-moments of high order are neglected. The co-moment criterion provides a unifying framework for the two equilibrium models of production under uncertainty, and has the merit of being based on information which is readily available.

Keywords: optimal choice of firm's investment, co-moment formula for security prices, co-moment criterion for firms

JEL Classification: D21, D51

Suggested Citation

Magill, Michael J. P. and Quinzii, Martine, A Co-Moment Criterion for Firms for the Two Canonical Models of Production Under Uncertainty (February 2008). Available at SSRN: https://ssrn.com/abstract=1123705 or http://dx.doi.org/10.2139/ssrn.1123705

Michael J. P. Magill

University of Southern California - Department of Economics ( email )

3620 South Vermont Ave. Kaprielian (KAP) Hall, 300
Los Angeles, CA 90089
United States
213-740-2104 (Phone)
213-740-8543 (Fax)

Martine Quinzii (Contact Author)

University of California, Davis - Department of Economics ( email )

One Shields Drive
Davis, CA 95616-8578
United States
530-752-1567 (Phone)
530-752-9382 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
22
Abstract Views
305
PlumX Metrics