Risk-Averse Agent

Part of the SpringerBriefs in Operations Management book series (BRIEFSOPERMAN)


What if the agent is risk-averse. Fluctuations of the agent’s revenue stream occur because the principal’s equipment unit can be either in state 0 (‘operational’) or in state 1 (‘down’). In the operational state the penalty rate is 0, whereas in the down state the penalty rate is p. In other words, the penalty rate at any point of time can be modeled as pB where B is a Bernoulli random variable of value 0 with probability \(P(0) =\mu /(\lambda +\mu )\) and value 1 with probability \(P(1) =\lambda /(\lambda +\mu )\). The dispersion of B decreases as P(1) moves away from 1∕2 in either direction. Denote momentarily a ≡ P(1).


Risk-neutral Agents Penalty Rate Expected Utility Rate Optimal Service Capacity Revenue Rate 
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© Springer International Publishing Switzerland 2016

Authors and Affiliations

  1. 1.Eller College of ManagementUniversity of ArizonaTucsonUSA

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