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- Title
Models of the Firm and International Trade under Uncertainty.
- Authors
Baron, David P.; Forsythe, Robert
- Abstract
This article focuses on international trade in relation to the theory of the firm under uncertainty. One of the significant advances in economic theory has been the incorporation of uncertainty into the models used to investigate economic behavior. One class of models into which uncertainty has been incorporated can be labeled as entrepreneurial models in which the firm is assumed to maximize the expected utility of profit. The results from these models indicate, for example, that production decisions depend on the preferences and expectations of the entrepreneur and thus that the results of deterministic theory do not in general obtain. A second class of models assumes that markets exist such that contracts either can be traded contingent on each state of nature or such that there are as many securities as there are states. The principal result of these complete market models is that consumers have sufficient opportunities to trade so that marginal rates of substitution are equated across states. A third class of models that deals with these issues was initiated by Peter Diamond's study of a model with an incomplete market structure in which the only opportunity consumers have to allocate risks is by trading the shares of firms in a securities market.
- Subjects
INTERNATIONAL trade; UNCERTAINTY; BUSINESS enterprises; ENTREPRENEURSHIP; INDUSTRIAL organization (Economic theory)
- Publication
American Economic Review, 1979, Vol 69, Issue 4, p565
- ISSN
0002-8282
- Publication type
Article