Risk aversion and plant size: theory and application to tar-sands oil plants

Motivated by Canadian tar-sands oil plants, the dependence of plant size on various parameters for a risk-averse firm are investigated, assuming that construction lead time is increasing in size. Optimal plant size decreases with risk aversion, increases in mean price, and decreases in price uncertainty. If the firm's share in the plant is above optimal, we show that plant size increases as the share is decreased. Thus risk sharing can offset the effect of risk aversion on the optimal plant size. -Authors