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Changes in risk and entrepreneurship

Author

Listed:
  • Claudio A. Bonilla

    (University of Chile)

  • Marcos Vergara

    (Universidad del Desarrollo)

  • Richard Watt

    (University of Canterbury)

Abstract

In this paper, we extend the existing literature on entrepreneurship by analyzing the effects of changes in risk on two decisions made by the entrepreneur: first, the decision to transit from paid and risk-free employment to risky entrepreneurship, and second, the decision regarding the size or scale of the venture for transitioned entrepreneurs. We provide the conditions that guarantee expected comparative static results under first- and second-order stochastic dominance shifts. We then apply our results to the case of hyperbolic absolute risk aversion preferences, which is a specific functional form commonly used in the economics of risk literature. Interesting results arise from the analysis, where relative risk aversion, risk tolerance, and the inverse of prudence play key roles in our results.

Suggested Citation

  • Claudio A. Bonilla & Marcos Vergara & Richard Watt, 2022. "Changes in risk and entrepreneurship," Risk Management, Palgrave Macmillan, vol. 24(4), pages 367-385, December.
    • Handle: RePEc:pal:risman:v:24:y:2022:i:4:d:10.1057_s41283-022-00098-7
    DOI: 10.1057/s41283-022-00098-7
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    References listed on IDEAS

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    More about this item

    Keywords

    Changes in risk; Entrepreneurship; Stochastic dominance shifts; HARA preferences;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship

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