Hennessy, David A.

International Review of Economics and Finance Vol. 7 no. 3 (March 1998): 331-341.

This paper presents a general model of firm behavior in a risky environment when a risk management contract becomes available. While separation cannot be invoked, conclusions can still be drawn. Under nonincreasing absolute risk aversion (NIARA), the innovation increases production. An increase in wealth will either increase production or decrease contract use or both. Increases in contract premium and factor prices are found to decrease optimal input choice if the wealth effect is normal.