Most insurance companies are involved in reinsurance activities. For the majority, reinsurance means laying-off portions of the risk that they have assumed in the primary insurance market. A few other companies assume these laid-off risks. Our concern is with the former companies; that is, those seeking to cede a portion of their risk.

Journal Article Optimal Pricing to Retard Entry Get access Steven A. Lippman Steven A. Lippman University of California, Los Angeles Search for other works by this author on: Oxford Academic Google Scholar The Review of Economic Studies, Volume 47, Issue 4, July 1980, Pages 723–731, https://doi.org/10.2307/2296938 Published: 01 July 1980 Article history Received: 01 December 1977 Accepted: 01 September 1979 Published: 01 July 1980

When selecting amongst a set of investment projects, the decision-maker cannot act as if her decision is made in isolation: Each investment has an impact upon subsequent cash flows and affects with future investments will be feasible and desirable. Our model provides a dynamic context in which her investment decisions can be analyzed. Our model generalizes the multi-period investment models of Gale (1965), Lippman (1970), and Cantor and Lippman (1983), by allowing an arbitrary finite number of projects. We emphasize that neither interest rates, nor net present values, nor internal rates of return are part of our model. However, all three notions arise as a consequence of our basic assumptions. In this paper we introduce a new technique for evaluating bundles of investments, the upper envelope.

IN THIS PAPER we present a multiperiod model of investment and reinvestment in which the investor's goal is the maximization of terminal wealth over the finite horizon in which economic activity occurs. The model entails the absence of risk, constant returns-to-scale, stationarity, and a borrowing constraint. The main point is to characterize the relationship between an investment project's asymptotic (internal) growth rate and its set of internal-rates-of-return, thereby provid

Embedding the process of selling an asset in a search environment enables one to provide an exact definition of liquidity: an asset's liquidity is the expected time until it is sold while pursuing an optimal (in the sense of maximization of expected discounted net proceeds) policy. This analysis reveals that this definition is compatible with most other notions of liquidity and, in particular, with those of John Maynard Keynes, impatience, the discount associatedwith a quick sale, predictability, and flexibility. Copyright 1986 by American Economic Association.

The theory of the firm is a monumental achievement of neoclassical economics. Without this engine of analysis, it would be difficult, if not impossible, to comprehend the pricing, output, and input decisions of firms as they respond to routine events like the imposition of a tax, the opening of a new market, a technical innovation, and a sudden shortage of a key factor of production. It is remarkable that this theory has been successful in explaining behavior that to a large extent is motivated by both profit and risk when the theory itself has only explicitly considered the profit motive. This is not the place to dwell on the evolution of economic theory; it suffices to note that there are many important economic phenomena that the purely deterministic theory does not explain.' The purpose of this note is to elucidate the way in which risk influences the output decisions of riskaverse entrepreneurs and the number of riskneutral firms in a competitive industry. In both cases, the predicted behavior differs from that of the deterministic theory. In our study we shall restrict attention to the behavior of firms in a single period 2 setting. The firm has no control over price and, because storage makes no sense, simply sells all of its output at the going price. The source of uncertainty is the requirement that the firm produce before price is known, where the price is a random variable with a known probability distribution. The firm chooses output to maximize its expected utility. It is well-known that, in the presence of uncertainty, the optimal output of the risk-averse firm is less than that of the riskneutral firm; moreover, increases in risk aversion, in the sense of Arrow and John Pratt, lead to further diminutions in output. On the other hand, for a fixed degree of risk aversion, the change in output induced by a mean-preserving increase in risk depends on the shape of the cost curve as well as the sign of the third derivative of the utility function u and the sign of the second derivative of qu'(q). Next, competitive industry behavior under uncertainty is analyzed. In order to isolate the effect of uncertainty, firms are assumed to be risk neutral. We show that both the optimal number of firms in the industry and excess capacity increase as industry output becomes riskier. Results like this are important for probabilistic economics, for it would be unfortunate if the vitality of the stochastic theory of the firm relied solely on the controversial assumption of risk aversion.3