The Preservation of Comparative Statics under Uncertainty

Abstract

Comparative statics under uncertainty often differ dramatically from comparative statics under certainty. Under certainty, fixed costs that are sunk don’t affect supply. Sandmo (1971), however, showed that, if a finn fazes price uncertainty and is risk averse, then changes in fixed costs can affect its supply. Under certainty, input demands slope downward in own prices. Batra and Ullah (1974) however, showed that, if the finn faces price uncertainty and is risk averse, input demands might slope upward. Under certainty, either increasing the rate of return of an asset or decreasing its price trivially never decreases its demand (when other assets are present). Fishburn and Porter (1976) showed that increasing the rate of return of a safe asset in the presence of other risky assets might lead to lower demand for the safe asset, whereas Cheng, Magill and Shafer (1987) showed that increasing the price of a risky asset could raise its demand. In each case, the comparative statics result is preserved if the agent is assumed risk neutral, or if restrictions are imposed upon risk preferences.

I thank Susan Athey, Michele Cohen, Christian Gollier, Jack Meyer, Mike Ormiston and participants at the FUR VIII conference in Mom, Belgium for helpful comments and discussion. Part of this work was carried out during my visit to IDEI, University of Toulouse, during the fall of 1996; I an most grateful to that institute for its kind hospitality and support.