A Definition of 'More Systematic Risk' with Some Welfare Implications

Producers are subject to similar production risks, and so their outputs are likely correlated. Using the entire data-set rather than summary statistics, we study an ordinal definition of systematic risk. For risk-neutral producers in perfect competition, we trace the effects of an increase in systematic risk through to impacts on welfare measures and production decisions. Expected welfare falls under more systematic risk, but either of expected producer surplus or expected consumer surplus may rise. Our definition of systematic risk also has relevance for the incentive to incur R&D expenditures, the benefits of diversity and the gains from risk-sharing. Copyright The London School of Economics and Political Science 2003.