“Change in risk for a loss averse entrepreneur”

Abstract

We study how distributional shift in risk affect the decisions that a loss-averse entrepreneur must make regarding a business creation and the determination of the scale of the firm. In contrast to the results obtained in the classical model with risk-averse entrepreneurs, where stricter constraints over the properties of the utility function are required to achieve the same expected outcome, we show that there are more business creation and increases in the scale of the firms under first and second order stochastic dominance improvements.