Risk aversion, proportional profit taxes and input demands under uncertainty

Abstract

Many proposed and current tax policies may impact input use of risk-averse firms. This article examines a risk-averse firm's response to profit taxes under production and output price uncertainty. It extends the literature by providing a framework to examine the impacts of profit taxes on a risk-averse firm's input use under uncertainty. The comparative static results show that although profit tax policies do not have an impact on input use under certainty and risk-neutrality, they impact risk-averse firms’ input use under uncertainty. The impact of the profit taxes on input use depends on the form of production uncertainty, risk-input relationships, risk attitudes, and degrees of output price and production uncertainty. These results have implications for developing and implementing tax and other public policies.