The optimal behaviour of firms facing stochastic costs

• BSE Working Paper: 110634 | September 15
• Keywords: Risk Aversion , Firm behaviour , portfolio theory , uncertainity
• JEL codes: C61, D21, D81, G11
• Risk Aversion
• Firm behaviour
• portfolio theory
• uncertainity

This paper aims at assessing the optimal behavior of a firm facing stochastic costs of production. In an imperfectly competitive setting, we evaluate to what extent a firm may decide to locate part of its production in other markets different from which it is actually settled. This decision is taken in a stochastic environment. Portfolio theory is used to derive the optimal solution for the intertemporal profit maximization problem. In such a framework, splitting production between different locations may be optimal when a firm is able to charge different prices in the different local markets.