The Production Of Goods In Excess Of Demand: A Generalization Of Self Protection

Abstract

We consider a risk-averse firm producing a limited number of goods which can be defective. The firm must determine its level of production before knowing which goods will be defective. This is the case for example for a producer of telecommunication satellites. The problem under scrutiny can be interpreted as a generalization of self protection for more than two states of nature. In our model, the firm determines jointly its level of production and its demand for insurance. It is shown that, under reasonable assumptions, the two strategies are complements.