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Risk, risk aversion, and a finance-augmented neoclassical economic model of production

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  • Jin, Yi
  • Zeng, Zhixiong

Abstract

We analyze the financial and macroeconomic environment within which production activity is embedded, and study the effects on equilibrium production of shocks to banking risk and to investor risk aversion in a general equilibrium setting. Given investor risk aversion, the total effect of a banking risk shock is decomposed into a bankruptcy effect and a risk-aversion effect. Allowing for changes in investor risk aversion, an accounting framework is developed to quantify the contributions of various shocks. When calibrated to financial data during the Global Financial Crisis, the risk–risk attitude shocks interact to generate large declines in employment and output.

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  • Jin, Yi & Zeng, Zhixiong, 2016. "Risk, risk aversion, and a finance-augmented neoclassical economic model of production," International Journal of Production Economics, Elsevier, vol. 176(C), pages 82-91.
    • Handle: RePEc:eee:proeco:v:176:y:2016:i:c:p:82-91
    DOI: 10.1016/j.ijpe.2016.03.009
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    More about this item

    Keywords

    Financial frictions; bankruptcy; risk aversion; financial crisis;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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