The short-run shutdown decision when output price and initial wealth are random

This paper extends the research of Hori and Chavas by investigating the short-run shutdown decision of the competitive firm under output price risk when initial wealth is random. Central to this endeavor are the results of Doherty and Schlesinger, and Doherty et al., concerning global and local risk premia under multiple sources of risk. Using a local risk premium, Two novel and intuitively-pleasing results are reported here. The reservation price of the shutdown decision varies: (a) according to the diversification of the decision maker’s cash flows, and (b) if the decision maker exhibits DARA, then according to the depth of decision maker’s pockets.