Optimal Investment Behavior for Regret-Averse Competitive Firms under Price Uncertainty

Abstract

In this paper, we try to analyze the optimal capital and labor input of a competitive firm under price uncertainty from the perspective of regret aversion rather than of risk aversion. We show that the optimal input of capital and labor for the competitive firm under certain price are higher than those for the regret-averse competitive firm under price uncertainty. Moreover, we prove that the optimal input will increase or decrease with the movement of the regret factor. Besides, we find that the higher the expected probability of the output price turns out to be high and sales turn to be good, the less impacts of the changes of the weight of regret aversion relative to risk aversion would on the optimal capital and labor input.