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Risk-Taking Behavior with Limited Liability and Risk Aversion

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Author Info
Christian Gollier
Pierre-François Koehl
Jean-CharlesRochet

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Abstract

The authors of this paper consider the problem of a risk-averse firm with limited liability. The firm has to select the size of its investment in a risky project. We show that the optimal exposure to risk of the limited liability firm is always larger than under full liability. Moreover, there exists a positive lower bound on the value of the firm below which the firm will "bet for resurrection," i.e. it will invest the largest positive amount in the risky project. We also consider the standard portfolio problem with more than one risky asset. We show that limited liability may induce the firm to specialize in no Mean-Variance efficient assets.

This paper was presented at the Financial Institutions Center's May 1996 conference on "

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Paper provided by Wharton School Center for Financial Institutions, University of Pennsylvania in its series Center for Financial Institutions Working Papers with number 96-13.

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Date of creation: May 1996
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Handle: RePEc:wop:pennin:96-13

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Dionne, Georges & Eeckhoudt, Louis & Gollier, Christian, 1993. "Increases in Risk and Linear Payoffs," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(2), pages 309-19, May. [Downloadable!] (restricted)
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  2. Golbe, Devra L., 1988. "Risk-taking by firms near bankruptcy," Economics Letters, Elsevier, vol. 28(1), pages 75-79. [Downloadable!] (restricted)
  3. Rochet, Jean-Charles, 1992. "Capital requirements and the behaviour of commercial banks," European Economic Review, Elsevier, vol. 36(5), pages 1137-1170, June. [Downloadable!] (restricted)
  4. Gollier Christian, 1995. "The Comparative Statics of Changes in Risk Revisited," Journal of Economic Theory, Elsevier, vol. 66(2), pages 522-535, August. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Giuseppe Dari-Mattiacci & Gerrit de Geest, 2004. "When Will Judgment Proof Injurers Take Too Much Precaution?," Working Papers 04-27, Utrecht School of Economics. [Downloadable!]
  2. Christian Gourieroux & J. P. Laurent & Olivier Scaillet, 2000. "Sensitivity Analysis of Values at Risk," Econometric Society World Congress 2000 Contributed Papers 0162, Econometric Society. [Downloadable!]
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  3. Palomino, Frédéric & Prat, Andrea, 1999. "Risk Taking and Optimal Contracts for Money Managers," CEPR Discussion Papers 2066, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  4. Shuyun May Li, 2008. "Costly External Finance, Reallocation, and Aggregate Productivity," Department of Economics - Working Papers Series 1044, The University of Melbourne. [Downloadable!]
  5. Hans-Werner Sinn, 2001. "Risk Taking, Limited Liability and the Competition of Bank Regulators," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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  6. Livio Stracca, 2005. "Delegated portfolio management: a survey of the theoretical literature," Working Paper Series 520, European Central Bank. [Downloadable!]
    Other versions:
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