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Risk aversion and technology portfolios

  • Guy Meunier

    (ALISS - Alimentation et sciences sociales - Institut national de la recherche agronomique (INRA) : UR1303, Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X)

The choice of a portfolio of technologies by risk averse firms is analyzed. Two technologies with random marginal costs are available to produce a homogeneous good. If the risks associated to the technologies are correlated firms might invest in a technology with a negative expected return or conversely might not invest in a technology with a positive expected return. If the technology with the lower expected cost is more risky than the other technology this technology can be driven out of the fi rms' portfolio if risks are highly correlated. With imperfect competition the portfolios of firms are di fferent, and diff erence in risk aversion can explain a full specialization of the industry, the less risk averse fi rms using the low cost technology and the more risk averse fi rms the other one. The framework is used to discuss the issue of investment in electricity markets.

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Date of creation: 10 Dec 2012
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Handle: RePEc:hal:wpaper:hal-00763358
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