An Application of Duality under Uncertainty, Elie Appelbaum

The purpose of this paper is to provide an empirical application of duality under uncertainty. Using the indirect utility function we develop a simple, empirically implementable framework, that can be used to estimate the effects of price uncertainty on firms’ behaviour. The model is used to test implications of the theory and to identify the effects of uncertainty on input demand. In an empirical example we estimate the effects of (energy and output) price uncertainty on input demand by the U.S. manufacturing industry. We find that production responses indicate the existence of risk aversion and are consistent with behaviour under decreasing absolute risk aversion. The actual effects of uncertain prices on input demand were, however, rather small.