The Impact of Regret on Exports

Broll Udo, Wong Kit Pong and Peter Welzel ()
Additional contact information
Broll Udo: Technische Universität Dresden,Dresden, Germany
Wong Kit Pong: University of Hong Kong,Pok Fu Lam, Hong Kong

German Economic Review, 2016, vol. 17, issue 2, 192-205

Abstract: We examine optimal production and export decisions of a firm facing exchange rate uncertainty, where the firm’s management is not only risk averse but also regret averse, i.e., is characterized by a utility function that includes disutility from having chosen ex post suboptimal alternatives. Experimental and empirical results support the view that managers tend to be regret averse. Under regret aversion a negative risk premium need not preclude the firm from exporting which would be the case if the firm were only risk averse. Exporting creates an implicit hedge against the possibility of regret when the realized spot exchange rate turns out to be high. The regret-averse firm as such has a greater ex ante incentive to export than the purely risk averse firm. Finally, we use a two-state example to illustrate that the firm optimally exports more (less) to the foreign country than in the case of pure risk aversion if the low (high) spot exchange rate is more likely to prevail. Regret aversion as such plays a crucial role in determining the firm’s optimal allocation between domestic sales and foreign exports.

Keywords: Exchange rate uncertainty; exports; regret aversion (search for similar items in EconPapers)
Date: 2016
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://doi.org/10.1111/geer.12076 (text/html)
For access to full text, subscription to the journal or payment for the individual article is required.

Related works:
Journal Article: The Impact of Regret on Exports (2016)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bpj:germec:v:17:y:2016:i:2:p:192-205

Ordering information: This journal article can be ordered from
https://www.degruyter.com/journal/key/ger/html

DOI: 10.1111/geer.12076

Access Statistics for this article

German Economic Review is currently edited by Peter Egger, Almut Balleer, Jesus Crespo-Cuaresma, Mario Larch, Aderonke Osikominu and Georg Wamser

More articles in German Economic Review from De Gruyter
Bibliographic data for series maintained by Peter Golla ().