The pure advantage of risk in production

An increase in the riskiness of a technology will raise economy-wide expected output: the technology can be used intensively if its productivity realization is large and curtailed otherwise. Some investment in even the riskiest technologies can therefore bring Pareto improvements. The observed expected output of risky technologies, however, will be less than that of safer technologies: empirical estimates of expected output are therefore a poor measure of efficiency. Firms will nevertheless experiment efficiently with risky technologies when markets are competitive, contrary to the view that innovation requires a monopoly reward. The increases in risk that expand output must be substantial however: a small increase will diminish welfare regardless of how widely it is instituted