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Are Polish firms risk-averting or risk-loving? : evidence on demand uncertainty and the capital-labour ratio in a transition economy

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  • Lensink, Robert
  • Murinde, Victor
  • Green, Christopher J.

    (Groningen University)

Abstract

This paper investigates the effect of demand uncertainty on the capital-labour ratio of non-financial firms in Poland in order to infer the firms’ risk behaviour. A generic model is used to characterise a utility maximising firm in a transition economy with demand uncertainty and imperfect competition. It is assumed that labour is completely variable and capital is quasi-fixed. The demand for capital, and hence the capital-labour ratio, derives from the optimisation of expected costs and the firm’s pricing and output decisions, and crucially depends on the sign of the covariance term i.e. the firm’s risk behaviour. The main proposition of the model is that if firms are risk-loving, an increase in demand uncertainty increases the capital-labour ratio, whereas the capital-labour ratio would decrease when a firm is risk-averting. The model is estimated using data from a cross-section of 148 non-financial firms in Poland. The results unambiguously show that there exists a significant positive relationship between demand uncertainty and the capital-labour ratio. This finding suggests that Polish firms are risk-lovers. The evidence may have important implications for the needed set of regulations and corporate governance in Poland as part of the necessary economic reform.

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File URL: http://irs.ub.rug.nl/ppn/188203184
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Bibliographic Info

Paper provided by University of Groningen, Research Institute SOM (Systems, Organisations and Management) in its series Research Report with number 99E13.

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Date of creation: 1999
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Handle: RePEc:dgr:rugsom:99e13

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  1. Ghosal, Vivek, 1991. "Demand Uncertainty and the Capital-Labor Ratio: Evidence from the U.S. Manufacturing Sector," The Review of Economics and Statistics, MIT Press, vol. 73(1), pages 157-61, February.
  2. Ghosal, Vivek, 1995. "Input Choices under Price Uncertainty," Economic Inquiry, Western Economic Association International, vol. 33(1), pages 142-58, January.
  3. Vivek Ghosal & Prakash Loungani, 1995. "Product market competition and the impact of price uncertainty on investment: some evidence from U.S. manufacturing industries," International Finance Discussion Papers 517, Board of Governors of the Federal Reserve System (U.S.).
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