The Output Decision of a Risk-Neutral Producer under Risk of Liquidation

Oliver Mahul

American Journal of Agricultural Economics, 2000, vol. 82, issue 1, 49-58

Abstract: 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. Copyright 2000, Oxford University Press.

Date: 2000
References: Add references at CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
http://hdl.handle.net/10.1111/0002-9092.00005 (application/pdf)
Access to full text is restricted to subscribers.

Related works:
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:oup:ajagec:v:82:y:2000:i:1:p:49-58

Access Statistics for this article

American Journal of Agricultural Economics is currently edited by Madhu Khanna, Brian E. Roe, James Vercammen and JunJie Wu

More articles in American Journal of Agricultural Economics from Agricultural and Applied Economics Association Contact information at EDIRC.
Bibliographic data for series maintained by Oxford University Press ().