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An Endogenous Attitude to Firms’ Risk Aversion: A Model

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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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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  1. 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.
  2. Djankov, Simeon & Murrell, Peter, 2002. "Enterprise Restructuring in Transition: A Quantitative Survey," CEPR Discussion Papers 3319, C.E.P.R. Discussion Papers.
  3. Mathias Dewatripont & Eric Maskin, 1995. "Credit and efficiency in centralized and decentralized economies," ULB Institutional Repository 2013/9603, ULB -- Universite Libre de Bruxelles.
  4. J. Kornai & E. Maskin & G. Roland., 2004. "Understanding the Soft Budget Constraint," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 11.
  5. Leland, Hayne E, 1972. "Theory of the Firm Facing Uncertain Demand," American Economic Review, American Economic Association, vol. 62(3), pages 278-91, June.
  6. Eaton, Jonathan & Gersovitz, Mark & Stiglitz, Joseph E., 1986. "The pure theory of country risk," European Economic Review, Elsevier, vol. 30(3), pages 481-513, June.
    • Jonathan Eaton & Mark Gersovitz & Joseph E. Stiglitz, 1991. "The Pure Theory of Country Risk," NBER Chapters, in: International Volatility and Economic Growth: The First Ten Years of The International Seminar on Macroeconomics, pages 391-435 National Bureau of Economic Research, Inc.
  7. Bruce C. Greenwald & Joseph E. Stiglitz, 1988. "Financial Market Imperfections and Business Cycles," NBER Working Papers 2494, National Bureau of Economic Research, Inc.
  8. 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.
  9. Bruce Greenwald & Joseph E. Stiglitz, 1993. "New and Old Keynesians," Journal of Economic Perspectives, American Economic Association, vol. 7(1), pages 23-44, Winter.
  10. Arthur Hau, 2004. "Theory of the firm facing uncertain demand revisited," Economic Theory, Springer, vol. 24(2), pages 457-464, August.
  11. 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.
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