Carmen F. Menezes

Outside Risk Aversion and the Comparative Statics of Increasing Risk in Quasi-linear Decision Models

Necessary and sufficient conditions are derived to determine the effect of increases in Rothschild-Stiglitz risk on optimal decisions in a class of competitive models with price uncertainty. Outside risk aversion and composite outside risk aversion are defined. The effect of increased risk on the optimal decision is controlled by composite outside risk aversion. It is decomposed into a wealth effect, controlled by downside risk aversion, and an uncertainty effect, controlled by outside risk aversion. Composite outside risk aversion is shown to be equivalent to outside risk aversion, so that the uncertainty effect controls the overall effect. Copyright 1995 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Constant returns to scale and competitive equilibrium under uncertainty

Abstract This paper considers the implications of the assumption of constant returns to scale in expected utility maximizing models of the competitive firm or industry in which markets for risk are absent. Under widely used assumptions about risk preferences it is shown that with constant returns to scale average profits are more than necessary to cover the implicit costs of risk-bearing. When the free entry of identical firms is possible this assumption about technology is shown to be incompatible with the assumption that entrepreneurs are risk averse.

The Effect of Capital Risk on Optimal Saving Decisions

I. Introduction, 653. — II. Preferences for sure and risky consumption bundles, 654. — III. Saving under certainty and under capital risk, 659. — IV. Comparison with the literature, 665.

On the magnitude of relative risk aversion

Abstract This paper shows how the exact value of relative risk aversion can be found if it is constant. For general utility functions a lower bound can be determined using a new risk aversion measure called probability markup.

A Theory of Price-Fixing Rings

Price-fixing rings with market sharing arrangements are an empirically important category of cartel phenomena. This paper develops a cartel model in which side payments are not allowed and firms engage in negotiations to fix price and market shares under conditions of demand uncertainty. The negotiated agreement reflects cost averaging and yields a solution on the contract curve. The price determined by unit cost averaging ensures acceptable profits for the firms while the risks associated with slack demand and excess capacity are spread across the firms in accordance with the division of the market. The models predictions are consistent with available empirical evidence.

Optimal Decisions with Linear Random Payoff

This paper provides a unified analysis of decision under uncertainty with payoffs that are linear in the random variable. This class involves additive as well as multiplicative risks and is widely used in the literature. The total effect of an increase in risk on choice is decomposed into an income effect and a substitution effect. Properties of preferences that control the sign of these effects are identified.

The comparative statics of a competitive industry facing demand uncertainty

Abstract The comparative statics of a competitive industry under uncertainty with free entry is clarified and extended using the general structure of random demand due to Leland (1972). While strong results are obtained for the industry, few unambiguous results can be derived for the firm.