INPUT CHOICES UNDER PRICE UNCERTAINTY

Theory shows that, depending on risk preferences and technological parameters, price uncertainty may alter firms' choice of capital intensity. This paper presents an empirical analysis of the effect of price uncertainty on firms' choices of capital and labor stocks. Empirical results from a cross-section of manufacturing industries, as well as within-industries over time, show that greater price uncertainty increases an industry's capital-labor ratio. It appears that risk aversion does not dominate firms' decision making. These empirical findings have implications for the analysis of factor demand and productivity; and capacity utilization rates.