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An Endogenous Attitude to Firms’ Risk Aversion: A Model

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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.

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Bibliographic Info

Article provided by Charles University Prague, Faculty of Social Sciences in its journal Finance a uver - Czech Journal of Economics and Finance.

Volume (Year): 57 (2007)
Issue (Month): 7-8 (September)
Pages: 382-399

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Handle: RePEc:fau:fauart:v:57:y:2007:i:7-8:p:382-399

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Keywords: attitude to risk; bankruptcy; financing; firm; soft budget constraint; uncertainty;

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References

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  1. Mathias Dewatripont & Eric Maskin, 1995. "Credit and efficiency in centralized and decentralized economies," ULB Institutional Repository 2013/9603, ULB -- Universite Libre de Bruxelles.
  2. Arthur Hau, 2004. "Theory of the firm facing uncertain demand revisited," Economic Theory, Springer, vol. 24(2), pages 457-464, August.
  3. Jonathan Eaton & Mark Gersovitz & Joseph E. Stiglitz, 1986. "The Pure Theory of Country Risk," NBER Working Papers 1894, National Bureau of Economic Research, Inc.
  4. Bruce C. Greenwald & Joseph E. Stiglitz, 1990. "Asymmetric Information and the New Theory of the Firm: Financial Constraints and Risk Behavior," NBER Working Papers 3359, National Bureau of Economic Research, Inc.
  5. J. Kornai & E. Maskin & G. Roland., 2004. "Understanding the Soft Budget Constraint," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 12.
  6. Djankov, Simeon & Murrell, Peter, 2002. "Enterprise Restructuring in Transition: A Quantitative Survey," CEPR Discussion Papers 3319, C.E.P.R. Discussion Papers.
  7. Fama, Eugene F & Jensen, Michael C, 1983. "Separation of Ownership and Control," Journal of Law and Economics, University of Chicago Press, vol. 26(2), pages 301-25, June.
  8. Sandmo, Agnar, 1971. "On the Theory of the Competitive Firm under Price Uncertainty," American Economic Review, American Economic Association, vol. 61(1), pages 65-73, March.
  9. Bruce C. Greenwald & Joseph E. Stiglitz, 1988. "Financial Market Imperfections and Business Cycles," NBER Working Papers 2494, National Bureau of Economic Research, Inc.
  10. Bruce Greenwald & Joseph E. Stiglitz, 1993. "New and Old Keynesians," Journal of Economic Perspectives, American Economic Association, vol. 7(1), pages 23-44, Winter.
  11. Leland, Hayne E, 1972. "Theory of the Firm Facing Uncertain Demand," American Economic Review, American Economic Association, vol. 62(3), pages 278-91, June.
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