Risk Market Innovations and Choice

David Hennessy

Staff General Research Papers Archive from Iowa State University, Department of Economics

Abstract: This paper presents a general model of firm behavior in a risky environment when a risk management contract becomes available. While separation cannot be invoked, conclusions can still be drawn. Under nonincreasing absolute risk aversion (NIARA), the innovation increases production. An increase in wealth will either increase production or decrease contract use or both. Increases in contract premium and factor prices are found to decrease optimal input choice if the wealth effect is normal.

Date: 1998-03-01
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Published in International Review of Economics and Finance, March 1998, vol. 7 no. 3, pp. 331-341

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