This paper investigates the effects of factor price stabilization on production decisions of the competitive firm with ex post production flexibility. Factor price stabilization is achieved through changes in the guaranteed minimum price and the imposed maximum price. For the risk-averse firm, the effect of factor price stabilization, through a mean-preserving contraction, on capital crucially depends on whether capital and the variable input are substitutes or complements as well as the observable characteristics of the variable input demand curve.
- Factor price stabilization
- Risk aversion