Risk Spillovers and Hedging: Why Do Firms Invest Too Much in Systemic Risk?
AbstractIn this paper we show that free entry decisions may be socially inefficient, even in a perfectly competitive homogeneous goods market with non-lumpy investments. In our model, inefficient entry decisions are the result of risk-aversion of incumbent producers and consumers, combined with incomplete financial markets which limit risk-sharing between market actors. Investments in productive assets affect the distribution of equilibrium prices and quantities, and create risk spillovers. From a societal perspective, entrants under-invest in technologies that would reduce systemic sector risk, and may over-invest in risk-increasing technologies. The inefficiency is shown to disappear when a complete financial market of tradable risk-sharing instruments is available, although the introduction of any individual tradable instrument may actually decrease efficiency. We therefore believe that sectors without well-developed financial markets will benefit from sector-specific regulation of investment decisions.
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Bibliographic InfoPaper provided by Tilburg University, Tilburg Law and Economic Center in its series Discussion Paper with number 2011-029.
Date of creation: 2011
Date of revision:
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Web page: http://www.tilburguniversity.nl/tilec/
investments in productive assets; hedging; systemic risk; risk spillovers;
Other versions of this item:
- Bert WILLEMS & Joris MORBEE, 2011. "Risk spillovers and hedging: why do firms invest too much in systemic risk?," Center for Economic Studies - Discussion papers ces11.17, Katholieke Universiteit Leuven, Centrum voor Economische Studiën.
- Bert Willems & Joris Morbee, 2012. "Risk Spillovers and Hedging: Why Do Firms Invest Too Much in Systemic Risk?," RSCAS Working Papers 2012/35, European University Institute.
- Willems, Bert & Morbee, J., 2011. "Risk Spillovers and Hedging: Why Do Firms Invest Too Much in Systemic Risk?," Discussion Paper 2011-057, Tilburg University, Center for Economic Research.
- L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
- L97 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Utilities: General
- H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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