- Link:
- http://hdl.handle.net/10023/2173
- Collection:
-
- Subjects
- Uninsurable business risks Markup Risk premium Hedge and offer Price intertia Stochastic dominance Conditional sales ratio HB Economic Theory HB
- Creators:
- Moon, Seongman Kim, Seong-Hoon
- Contributor:
- University of St Andrews. School of Economics and
Finance
- Description
- 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.
- Description
- Postprint
- Format
- 54
- Format
- text
- Language
- eng
- Relation
- Centre for Dynamic Macroeconomic Analysis, Working
Paper
- Rights
- (c) The authors
- Type
- Working or discussion paper
- Access:
- Instructions in case access is denied
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