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Abstract
This paper introduces a set of theoretical models that include a risk perception variable to a firm’s capital investment decision, allowing that perception variable to change over time, and how that risk perception impacts risk averse firms as compared to risk neutral. This variable, φ, accounts for heterogeneous differences in risk perception based on the firm’s past experiences and future expectations about temporary plant shutdowns. The base model was then calibrated with reasonable values for a real-world beef production firm considering twelve possible plant locations and three possible plant sizes per firm type. There were three firm types, representing different parts of the beef market: big four firms, which control the majority of the market, large fringe firms and small fringe firms. These different firms have total annual production goals that differ by an order of magnitude. The results of this calibration show changes in φ that maintain relitive risk relationships between plant location and size does not change the optimal plant configuration decision for any firms. The model allowing for φ to change over time was also calibrated and concluded similarly that for risk neutral firms φ changes that maintain the relitive risk relationships do not change the optimal plant configurations. Lastly the risk averse firm model showed that a firm being risk averse as opposed to risk neutral does change the optimal plant configurations