Risk, risk aversion, and a finance-augmented neoclassical economic model of production

Yi Jin and Zhixiong Zeng

International Journal of Production Economics, 2016, vol. 176, issue C, 82-91

Abstract: We analyze the financial and macroeconomic environment within which production activity is embedded, and study the effects on equilibrium production of shocks to banking risk and to investor risk aversion in a general equilibrium setting. Given investor risk aversion, the total effect of a banking risk shock is decomposed into a bankruptcy effect and a risk-aversion effect. Allowing for changes in investor risk aversion, an accounting framework is developed to quantify the contributions of various shocks. When calibrated to financial data during the Global Financial Crisis, the risk–risk attitude shocks interact to generate large declines in employment and output.

Keywords: Financial frictions; bankruptcy; risk aversion; financial crisis (search for similar items in EconPapers)
JEL-codes: D86 E44 G32 (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:eee:proeco:v:176:y:2016:i:c:p:82-91

DOI: 10.1016/j.ijpe.2016.03.009

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