An Endogenous Attitude to Firms’ Risk Aversion: A Model
Year: 2007 Volume: 57 Issue: 7 -8 Pages: 382-399
Abstract: The paper examines the risk behavior of a competitive firm under price uncertainty. The model developed in the paper departs from Greenwald and Stiglitz (1993a), which singly implies risk-averse behavior. The incorporation of more general assumptions about a firm’s financing – access to the equity market, the possibility of a soft budget constraint – allows the identification of a broader range of determinants of a firm’s attitude toward risk and, hence, optimal output. The results indicate that price and technology are not the only important factors in a firm’s optimal output level, as is the case for the neoclassical firm. The model also demonstrates that a firm’s net worth position, managerial sensitivity to bankruptcy, access to capital market, budget constraint softness, and degree of uncertainty about future prices may play important roles toward optimal output considerations.
JEL classification: D21, D81, G32
Keywords: attitude to risk, bankruptcy, financing, firm, soft budget constraint, uncertainty
RePEc: http://ideas.repec.org/a/fau/fauart/v57y2007i7-8p382-399.html
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