Risk preferences estimation of exporting firms under exchange rate uncertainty
| Author | Rudra Sensarma,Udo Broll,Soumyatanu Mukherjee |
| Date | 01 February 2020 |
| Published date | 01 February 2020 |
| DOI | http://doi.org/10.1111/sjpe.12226 |
RISK PREFERENCES ESTIMATION OF
EXPORTING FIRMS UNDER
EXCHANGE RATE UNCERTAINTY
Udo Broll*, Soumyatanu Mukherjee**,*** and Rudra Sensarma****
ABSTRACT
This note empirically analyses how exchange rate fluctuations affects firms’ opti-
mal production and exporting decisions. A firm’s elasticity of risk aversion deter-
mines the direction of the impact of exchange rate risk on exports. Based on a
flexible utility function that incorporates all possible risk preferences, a unique
structurally estimable equation is derived. Quantile regression method is used to
estimate this equation and compute the risk aversion elasticities for a panel of
Indian firms. This approach allows us to demonstrate how characteristics of expor-
ters at the intensive margin varies with the level of elasticities across the condi-
tional exchange rate distribution.
II
NTRODUCTION
There are a number of theoretical works that studied the production and export
decisions of an exporting firm using the standard von Neumann–Morgenstern
expected utility representation (see, for example, Kawai and Zilcha, 1986;
Viaene and Zilcha, 1998; Broll and Eckwert, 1999, 2009; Wong, 2003, to name
just a few). However, these contributions keep silent about the scenario when
risk preferences only contribute towards the relative change in the volume of
export vis-a-vis domestic sales at the intensive margin. Broll and Mukherjee
(2017) has been the only exception so far that has employed a simple theoretical
framework to study decision of an exporting domestic firm to allocate produc-
tion between domestic and the world market under exchange rate uncertainty.
However, to the best of our knowledge, there has not been any attempt yet
to empirically estimate risk preference structure of such exporting firms serv-
ing both local and the international markets and the risk aversion elasticities
across different levels of risk attitude of these firms. The contribution of this
note is precisely to do so: using Indian service sector firms as a case study we
demonstrate how to jointly estimate risk preference structure and risk aversion
elasticities for exporting firms at the intensive margin. For this purpose, we
*Technische Universit€
at Dresden
**Indian Institute of Technology Kharagpur
***University of Nottingham
****Indian Institute of Management (IIM)
Scottish Journal of Political Economy, DOI: 10.1111/sjpe.12226, Vol. 67, No. 1, February 2020
©2019 Scottish Economic Society.
126
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