Estimating the firm's demand and supply functions under uncertainty without expected utility

Abstract

This paper extends the literature on firms’ behaviour under uncertainty by providing a simple framework for empirical analysis of general non-expected utility behaviour. We show that standard duality techniques can be used to derive and estimate demand and supply functions for non-expected utility maximizing firms. Moreover, the framework also provides a simple econometric test for a necessary condition for expected utility behaviour. In an empirical example we apply the model to the US Furniture and Fixtures industry and find that demand and supply functions retain all the usual “intuitive” properties. We test for expected utility behaviour and find that it cannot be rejected.

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