Endogenous Risk

Endogenous risk is the position that the quantity and structure of economic risk are not exogenous primitives handed to agents from outside the model, but equilibrium outcomes of incentive-driven choices. In the tractable general-equilibrium version developed by Kopytov, Taschereau-Dumouchel, and Xu (QJE 2026), each firm chooses the mean and variance of its own productivity process and how that process covaries with the productivity of every other firm; aggregate risk then arises when firms independently select productivity processes that are correlated with one another. ¹

The model’s core move

Standard macroeconomic models treat firm productivity as a stochastic process with fixed parameters — the firm reacts to shocks it cannot influence. Kopytov et al. instead give each firm a “risk-management” choice: underlying risk factors (a flood, a war, a drug discovery) exist outside the firm’s control, but the firm picks its exposure vector to those factors, trading the cost of risk management (lower average productivity, plus spending on land, managers, materials, lobbyists) against the benefit of a safer or more favorably correlated productivity stream. A farmer who plants by the river gets cheap irrigation and flood exposure; a firm that offshores production gets lower costs and geopolitical exposure. Aggregated across firms, these individual exposure decisions determine both firm-level volatility and the correlation structure that turns localized shocks into aggregate ones. ²

Predictions and evidence

The theory yields firm-level predictions that the authors test on detailed Spanish firm data: larger firms (high Domar weight) and firms with lower markups manage risk more aggressively, so they are less volatile and covary less with aggregate productivity. Both patterns hold in the data. At the aggregate level, the model implies that distortions — taxes, markups — alter risk-taking incentives and thereby make GDP more volatile in equilibrium; in the calibrated model, removing distortions produces a large decline in aggregate volatility. Policy therefore has leverage over the business cycle not only by responding to shocks but by shaping how much risk the private sector chooses to carry. ³

Lineage and context

The paper sits in a recognizable lineage: Fischer Black’s Business Cycles: An Equilibrium Approach and Cowen’s Risk and Business Cycles both argued that risk choices belong inside equilibrium theory; Acemoglu et al. (2012) supplied the “network origins of aggregate fluctuations” mechanism by which firm-level shocks propagate; and Kopytov et al.’s own earlier Econometrica (2024) modeled endogenous production networks under supply-chain uncertainty. The 2026 QJE paper generalizes the move from endogenous network structure to endogenous risk structure. Tyler Cowen’s Marginal Revolution notice (the vault’s entry point) flags the Fischer Black connection explicitly. ⁴

Limitations

The model is deliberately stylized: markets are complete, so firms value cash flows with the representative household’s stochastic discount factor, and the authors concede that entrepreneurial undiversifiable risk would likely amplify the mechanism. The framework is static; it does not model risk choice evolving over time. The headline policy number (distortion removal sharply cuts GDP volatility) is a calibration result, not an estimate. Confidence is medium: the micro predictions are empirically supported, but the aggregate claim rests on one calibrated model.

Connections

• common-mode-failure — the same phenomenon in engineering: independently reasonable redundancy choices that correlate failures across a system. Endogenous risk is the economic generalization: correlation is chosen, not given.
• vuca — VUCA treats volatility as an environmental condition organizations must survive; endogenous risk says the environment’s volatility is partly the aggregate of those organizations’ own choices.
• ai-as-normal-technology — both push back on exogenous-shock framings: risk and diffusion rates are endogenous to incentives and institutions.
• trust-and-social-capital — social capital is one of the informal institutions that changes the price of risk exposure (trust substitutes for formal risk management).

Sources

• Alexandr Kopytov, Mathieu Taschereau-Dumouchel, and Zebang Xu 2026 — The Origin of Risk
• Tyler Cowen 2026 — The origin of risk

Footnotes

1. Alexandr Kopytov, Mathieu Taschereau-Dumouchel, and Zebang Xu 2026 — The Origin of Risk ↩

2. Alexandr Kopytov, Mathieu Taschereau-Dumouchel, and Zebang Xu 2026 — The Origin of Risk ↩

3. Alexandr Kopytov, Mathieu Taschereau-Dumouchel, and Zebang Xu 2026 — The Origin of Risk ↩

4. Tyler Cowen 2026 — The origin of risk ↩