Flexibility and Risk in the Firm

Manfred Zeller and Lindon Robison

European Review of Agricultural Economics, 1992, vol. 19, issue 4, 473-84

Abstract: This paper analyzes the role of use flexibility in investment and production decisions under risk. The underlying relationships between price risk, risk attitudes of the decision maker, and the degree of use flexibility chosen for a firm are derived from an ex ante-ex post-expected value variance model. It is shown that increasing output price risk and risk aversion lead firms to choose a less flexible organization. However, if production input or output constraints are uncertain, the firm may choose a more flexible organization in response to increases in risk and risk aversion. Thus, it is concluded that the preference for flexible investment designs changes as the source of risk changes. Copyright 1992 by Oxford University Press.

Date: 1992
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European Review of Agricultural Economics is currently edited by Timothy Richards, Salvatore Di Falco, Céline Nauges and Vincenzina Caputo

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