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Risk aggregation and the efficient selection of joint projects by a consortium

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  • Aloysius, John A.

Abstract

This paper analyzes the impact of risk attitudes on project funding decisions in research consortia. We outline an expected utility framework and show that aggregation of risk reduces risk aversion. We analyze the effects of managerial risk attitudes on the decision making process for R&D investment. We show that when funding research projects, firms should consider projects collectively rather than individually. The pooling of risk among projects can reduce inefficiencies in funding decisions. Furthermore, we show that participation in a consortium can increase efficiency in funding decisions, as the pooling of risk among firms can also alleviate risk aversion.

Suggested Citation

  • Aloysius, John A., 1999. "Risk aggregation and the efficient selection of joint projects by a consortium," Omega, Elsevier, vol. 27(3), pages 389-396, June.
    • Handle: RePEc:eee:jomega:v:27:y:1999:i:3:p:389-396
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    References listed on IDEAS

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    1. Daniel Kahneman & Dan Lovallo, 1993. "Timid Choices and Bold Forecasts: A Cognitive Perspective on Risk Taking," Management Science, INFORMS, vol. 39(1), pages 17-31, January.
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    Cited by:

    1. Aloysius, John A., 2005. "Ambiguity aversion and the equity premium puzzle: A re-examination of experimental data on repeated gambles," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 34(5), pages 635-655, October.
    2. Aloysius, John A., 1999. "Membership in a research consortium: the project selection game," Journal of Economic Behavior & Organization, Elsevier, vol. 40(3), pages 325-336, November.
    3. Xiao, Tiaojun & Choi, Tsan-Ming, 2009. "Purchasing choices and channel structure strategies for a two-echelon system with risk-averse players," International Journal of Production Economics, Elsevier, vol. 120(1), pages 54-65, July.
    4. A. V. Thomas & Satyanarayana Kalidindi & K. Ananthanarayanan, 2003. "Risk perception analysis of BOT road project participants in India," Construction Management and Economics, Taylor & Francis Journals, vol. 21(4), pages 393-407.
    5. Roma, Paolo & Perrone, Giovanni, 2016. "Cooperation among competitors: A comparison of cost-sharing mechanisms," International Journal of Production Economics, Elsevier, vol. 180(C), pages 172-182.
    6. Trappey, Charles V. & Shih, Tsui-Yii & Trappey, Amy J.C., 2007. "Modeling international investment decisions for financial holding companies," European Journal of Operational Research, Elsevier, vol. 180(2), pages 800-814, July.

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