Enhancing the Cournot model by integrating risk events and attitudes towards risk

This paper incorporates an operational risk event in the Cournot model. The risk event has impacts on the operational costs, but it is possible to control these costs after the event by implementing actions to mitigate those impacts. Naturally, these actions demand higher operational costs before the event. This study considers a common situation where risk-neutral company owners hire managers to establish both the production levels and the actions to mitigate the impacts of the risk event. While studying different combinations of risk attitude for managers, it is found that the highest expected profit in the equilibrium is reached when the managers present some degree of risk-seeking behaviour.