Risk Aversion and Plant Size: Theory and Application to Tar-Sands Oil Plants.

Motivated by Canadian tar-sands oil plants, the authors investigate the dependence of plant size on various parameters for a risk-averse firm, assuming that construction lead time is increasing in size. They show that 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, they 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.