Changes in risk and entrepreneurship

Claudio Bonilla, Marcos Vergara () and Richard Watt ()
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Marcos Vergara: Universidad del Desarrollo
Richard Watt: University of Canterbury

Risk Management, 2022, vol. 24, issue 4, No 4, 367-385

Abstract: Abstract In this paper, we extend the existing literature on entrepreneurship by analyzing the effects of changes in risk on two decisions made by the entrepreneur: first, the decision to transit from paid and risk-free employment to risky entrepreneurship, and second, the decision regarding the size or scale of the venture for transitioned entrepreneurs. We provide the conditions that guarantee expected comparative static results under first- and second-order stochastic dominance shifts. We then apply our results to the case of hyperbolic absolute risk aversion preferences, which is a specific functional form commonly used in the economics of risk literature. Interesting results arise from the analysis, where relative risk aversion, risk tolerance, and the inverse of prudence play key roles in our results.

Keywords: Changes in risk; Entrepreneurship; Stochastic dominance shifts; HARA preferences (search for similar items in EconPapers)
JEL-codes: D81 L26 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1057/s41283-022-00098-7

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