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The Output Decision of a Risk-Neutral Producer under Risk of Liquidation

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  • Oliver Mahul

Abstract

A risk-neutral producer faces liquidity constraint that forces him to liquidate real assets in imperfect markets if he cannot meet his cash obligation, entailing a fixed liquidation cost. Under this risk of liquidation, the risk-neutral producer is shown to refuse to undertake a risky project with positive expected excess return, exhibiting first-order risk aversion. The optimal output level of the producer is piecewise linear in wealth; it decreases or increases depending on whether the expected excess return is positive or negative. The producer's apparent utility function exhibits an S-shaped curve when the initial liquid assets are affected by a background risk that is normally distributed. Copyright 2000, Oxford University Press.

Suggested Citation

  • Oliver Mahul, 2000. "The Output Decision of a Risk-Neutral Producer under Risk of Liquidation," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 82(1), pages 49-58.
    • Handle: RePEc:oup:ajagec:v:82:y:2000:i:1:p:49-58
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    File URL: http://hdl.handle.net/10.1111/0002-9092.00005
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    Cited by:

    1. Blank, Steven C., 2001. "The Challenge To Think Big As American Agriculture Shrinks," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 26(2), pages 1-17, December.
    2. Blank, Steven C., 2001. "Globalization, Cropping Choices, and Profitability in American Agriculture," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 33(2), pages 315-326, August.
    3. Steven C. Blank, 2002. "A Portfolio Of Threats To American Agriculture," Contemporary Economic Policy, Western Economic Association International, vol. 20(4), pages 381-393, October.
    4. Tadesse, Dawit & Blank, Steven C., 2003. "Cultivar Diversity: A Neglected Risk Management Strategy," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 28(2), pages 1-16, August.
    5. Chiu, Leslie J. Verteramo & Turvey, Calum G., 2013. "A Risk Rationing Model," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 150628, Agricultural and Applied Economics Association.
    6. Chiu, Leslie J. Verteramo, 2013. "Risk Rationing and Jump Utility," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 150589, Agricultural and Applied Economics Association.
    7. Vercammen, James, 2003. "A Stochastic Dynamic Programming Model Of Direct Subsidy Payments And Agricultural Investment," Working Papers 15847, University of British Columbia, Food and Resource Economics.

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