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Transmission of Risk-Averse Behavior in Small Firms

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  • Dennis Patrick Leyden
  • Albert N. Link

Abstract

Small-sized firms are typically more entrepreneurial and engage in more innovation and risk-taking behavior. For that reason they are considered the engines of future economic growth. One policy for stimulating such activity is to provide government contracts for small firms. However, such contracts as typically written result in increased risk-averse behavior on the part of small firms out of a desire by government officials to shift the risk to the firms. This, in turn results in a reduced level of innovative and entrepreneurial activity. To eliminate the disincentive to engage in innovation and entrepreneurial activity, government needs to bear the risk associated with such contracts. One possible solution, given the natural risk aversion of elected officials, is to engage in a portfolio approach to small firm contracts by which the government can diversify away some of the risk.

Suggested Citation

  • Dennis Patrick Leyden & Albert N. Link, 2004. "Transmission of Risk-Averse Behavior in Small Firms," Small Business Economics, Springer, vol. 23(3), pages 255-259, October.
    • Handle: RePEc:kap:sbusec:v:23:y:2004:i:3:p:255-259
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    Cited by:

    1. Earnhart, Dietrich & Mark Leonard, J., 2016. "Environmental audits and signaling: The role of firm organizational structure," Resource and Energy Economics, Elsevier, vol. 44(C), pages 1-22.

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