Econometric tests of firm decision making under dual sources of uncertainty

Abstract

This paper extends previous work on the behavior of the competitive firm under a single source of uncertainty to dual sources of uncertainty. The indirect expected utility function is used to derive symmetry restrictions for a general form of the direct utility function. These restrictions are then used to test for different forms of the utility function and the nature of risk aversion under price and exchange rate uncertainty. The empirical results are consistent with the expected utility maximization hypothesis, and support the existence of a separable utility function.