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Financial conditions and supply decisions when firms are risk averse

  • Vanda TulliEmail author
  • Mauro Gallegati
  • Gerd Weinrich
Article
  • 13 Downloads

Abstract

Extending earlier work by Greenwald and Stiglitz (Q J Econ 108:77–114, 1993) on the role of a firm’s equity position and bankruptcy costs in determining its production decision we show that, even if bankruptcy costs are ignored, a firm’s decision makers’ risk aversion, whether they are owner-entrepreneurs or hired managers, can give rise to the same results. What is more, we argue that, in the presence of risk aversion, increased variance of the output price affects a firm’s supply decision as the sum of an impact and an indirect effect. Under reasonable assumptions the impact effect prevails and then output decreases. We show this to hold for risk attitudes represented both by CARA and by CRRA utility functions. Finally, we explore the dynamics of the equity base. We provide examples in which the accumulation of net worth slows down as a consequence of an increase of risk.

Keywords

Portfolio possibilities locus Financing gap Net worth Price volatility Risk aversion 

JEL Classification

D21 D81 G11 

Notes

Acknowledgements

This paper has greatly benefitted from valuable and helpful comments and suggestions by Domenico Delli Gatti and two anonymous referees. The responsability for remaining shortcomings is the authors’ only.

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Copyright information

© Springer-Verlag GmbH Austria, part of Springer Nature 2019

Authors and Affiliations

  1. 1.Dipartimento di Statistica e Metodi QuantitativiUniversità di Milano-BicoccaMilanItaly
  2. 2.Dipartimento di ManagementUniversità Politecnica delle Marche, AnconaAnconaItaly
  3. 3.Catholic University of MilanMilanItaly

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