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The Impact of Regret on Exports

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  • Udo Broll
  • Peter Welzel
  • Kit Pong Wong

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.
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Suggested Citation

  • Udo Broll & Peter Welzel & Kit Pong Wong, 2016. "The Impact of Regret on Exports," German Economic Review, Verein für Socialpolitik, vol. 17(2), pages 192-205, May.
    • Handle: RePEc:bla:germec:v:17:y:2016:i:2:p:192-205
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    File URL: http://hdl.handle.net/10.1111/geer.12076
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    Cited by:

    1. Broll, Udo & Welzel, Peter & Wong, Kit Pong, 2019. "Hedging and the regret theory of the competitive firm," CEPIE Working Papers 05/19, Technische Universität Dresden, Center of Public and International Economics (CEPIE).
    2. Subhadip Mukherjee & Soumyatanu Mukherjee & Tapas Mishra & Udo Broll & Mamata Parhi, 2021. "Spot exchange rate volatility, uncertain policies and export investment decision of firms: a mean-variance decision approach," The European Journal of Finance, Taylor & Francis Journals, vol. 27(8), pages 752-773, May.

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