Separability of stochastic production decisions from producer risk preferences in the presence of financial markets

We demonstrate the existence of a partially separating equilibrium based on the level of equity retention when a project of unknown value is taken public by an entrepreneur whose risk preferences are unobservable. We show that any such equilibrium results in some (endogenous) strictly positive level of equity retention. The value of a second public signal corresponding to audited reports required under the 1933 Securities Act is also analyzed. We show that this second signal derives informational value from the presence of unobservable risk preferences even though it only concerns cash flows and is completely independent of risk characteristics. The paper concludes with some empirical implications.

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Inferring Risk Preferences Using Synthetic Win Bets in Horse Betting “Exotic” Markets

The Journal of Gambling Business and Economics ◽

10.5750/jgbe.v2i1.522 ◽

2013 ◽

Vol 2 (1) ◽

pp. 1-29

Author(s):

Philip O'Connor

Keyword(s):

Relative Risk ◽

Standard Deviation ◽

Risk Aversion ◽

Financial Markets ◽

Utility Function ◽

Utility Theory ◽

Risk Preferences ◽

Higher Order ◽

Relative Risk Aversion ◽

Higher Order Moments

Exotic bets: exactas, trifectas and superfectas are complicated gambles that depend on the ordering of horse in a race that can be studied by converting them into “synthetic” or “virtual” win bets. Using two ways of constructing synthetic win bets, it is shown that the favorite-longshot bias is a poor description of the returns of the trifecta and superfecta synthetic win bet. Rather, consistent with financial markets, the standard deviation of the payout of the synthetic win bet better describes the different returns of synthetic win bets.It is found that the synthetic win market dislikes standard deviation and kurtosis (and other higher-order even moments) and likes skewness (and other higher order odd moments), implying participants conform to standard utility theory in their choice between win and synthetic win bets and are not risk-loving. A co-efficient of relative risk aversion of about 3 is estimated. Including higher-order moments strongly affects the magnitude of utility function estimates.

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Fuzzy mathematical risk preferences based on stochastic production function among medium-scale hog producers

Journal of Intelligent & Fuzzy Systems ◽

10.3233/jifs-179972 ◽

2020 ◽

Vol 39 (4) ◽

pp. 4859-4868

Author(s):

Ning Wang ◽

Meng Sun ◽

Liu Yu ◽

Fazhu Jiang

Keyword(s):

Risk Aversion ◽

Production Function ◽

Risk Preferences ◽

Relative Price ◽

Single Element ◽

Medium Scale ◽

Input Element ◽

Stochastic Production ◽

Degree Of Risk ◽

Mean Risk

Farmers’ risk preferences and degree of risk aversion affect their production and management decisions. According to Just-Pope stochastic production function model, we get the expression of the single element risk-aversion coefficients that include input element and hog slaughter absolute price, compared with the expression of relative price mean risk-aversion coefficients, it can directly observe the influence of the element and output price on single element risk-aversion coefficients. Based on the regression procedures and the calculation method of the average value of the element risk-aversion coefficients, mean risk-aversion coefficients of per household medium-scale hog producers are calculated in 76 households, 11 counties, Heilongjiang province. The results show that medium-scale hog producers are risk-averse, accounting for 96%; newborn animal weight and feed consumption affect hog producers’ degree of risk aversion. The former is the risk-reducing input element, while the latter is the risk-increasing input element.

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Pareto-Improving Social Security Reform when Financial Markets Are Incomplete!?

The American Economic Review ◽

10.1257/aer.96.3.737 ◽

2006 ◽

Vol 96 (3) ◽

pp. 737-755 ◽

Cited By ~ 141

Author(s):

Dirk Krueger ◽

Felix Kubler

Keyword(s):

Social Security ◽

Financial Markets ◽

Incomplete Markets ◽

Labor Income ◽

Crowding Out ◽

Pareto Improvement ◽

Overlapping Generations Model ◽

Stochastic Production ◽

Unfunded Social Security ◽

Pareto Improving

This paper studies an overlapping generations model with stochastic production and incomplete markets to assess whether the introduction of an unfunded social security system leads to a Pareto improvement. When returns to capital and wages are imperfectly correlated, a system that endows retired households with claims to labor income enhances the sharing of aggregate risk between generations. Our quantitative analysis shows that, abstracting from the capital crowding-out effect, the introduction of social security represents a Pareto-improving reform, even when the economy is dynamically efficient. However, the severity of the crowding-out effect in general equilibrium tends to overturn these gains.

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