An Investigation of the Relationship Between Constraint Omission and Risk Aversion in Firm Risk Programming Models

Abstract

AbstractA model with omitted resource constraints is suggested as an alternative to a risk aversion model for explaining economic behavior. This paper uses two standard mathematical programming models to further explore this issue. One model is a standard profit maximization linear programming model and the other is a risk averse quadratic programming model with part of the constraints deleted. Theoretical investigation of these models demonstrates that risk aversion can substitute for omitted resource constraints. A small empirical model is then solved under both formulations. With resource constraints deleted, positive risk aversion is necessary to obtain a similar enterprise organization as under profit maximization with complete constraints. These two solutions are then interpreted with the theoretical optimality conditions.