Sandmo′s Model of the Competitive Firm in a Two-Moment World

Sandmo′s (1971) model of the competitive firm under output price uncertainty has been the object of on going research interest since its appearance in 1971. One measure of this interest is the fact that three distinct approaches to signing the marginal effect of risk have been identified. One of these has spawned new research into what is termed the two-moment model. The present paper offers a new bridge between the Sandmo model of the competitive firm and the domain of two-moment models. In particular, the present paper outlines how the Sandmo model might be recast in the context of a two-state world. In doing so, we offer a generalization of an obscure model by Sakai (1977).