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The Output Decision of a Risk‐Neutral Producer under Risk of Liquidation
Author(s) -
Mahul Oliver
Publication year - 2000
Publication title -
american journal of agricultural economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.949
H-Index - 111
eISSN - 1467-8276
pISSN - 0002-9092
DOI - 10.1111/0002-9092.00005
Subject(s) - liquidity constraint , market liquidity , risk neutral , constraint (computer aided design) , economics , order (exchange) , monetary economics , piecewise linear function , cash , imperfect , risk aversion (psychology) , microeconomics , expected utility hypothesis , financial economics , finance , mathematics , linguistics , philosophy , geometry
A risk‐neutral producer faces liquidity constraint that forces him to liquidate real assets in imperfect markets if he cannot meet his cash obligation, entailing a fixed liquidation cost. Under this risk of liquidation, the risk‐neutral producer is shown to refuse to undertake a risky project with positive expected excess return, exhibiting first‐order risk aversion. The optimal output level of the producer is piecewise linear in wealth; it decreases or increases depending on whether the expected excess return is positive or negative. The producer's apparent utility function exhibits an S‐shaped curve when the initial liquid assets are affected by a background risk that is normally distributed.