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On the microeconomics of diversification under learning

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Abstract

This paper investigates the microeconomics of diversification, based on a two-period model of an owner-managed firm facing uncertainty. The analysis focuses on the role of learning. Economies of diversification are defined based on a certainty equivalent and its decomposition into three components: expected profit (capturing scope effects), the risk premium (measuring the cost of risk aversion), and the value of information associated with learning. For each component, the influence of scale effects, trans-ray concavity effects, and income effects on economies of diversification are examined. By integrating risk, scope and the role of information, the analysis provides new insights into the microeconomics of diversification. While scope economies and risk aversion can provide general incentives for diversification, we argue that information and learning can give incentives to specialize. Implications for economic analysis are discussed.

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  1. University of Wisconsin, Madison, WI, 53706, USA

    Jean-Paul Chavas

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  1. Jean-Paul Chavas
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Chavas, JP. On the microeconomics of diversification under learning. J Econ 104, 25–47 (2011). https://doi.org/10.1007/s00712-011-0202-3

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