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Production and financial policies under asymmetric information

  • Jacques Drèze

    ()

  • Enrico Minelli

    ()

  • Mario Tirelli

    ()

We propose an extension of the standard general equilibrium model with production and incomplete markets to situations in which (i) private investors have limited information on the returns of specific assets, (ii) managers of firms have limited information on the preferences of individual shareholders. The extension is obtained by the assumption that firms are not traded directly but grouped into 'sectorial' funds. In our model the financial policy of the firm is not irrelevant; we define a decision criterion for the firm that takes into account both its production and financial decisions. With this criterion, we prove the existence of equilibria. Then we discuss the nature of the inefficiencies introduced by the presence asymmetric information. In an appendix we illustrate the properties of the model in the CAPM framework.

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Article provided by Springer in its journal Economic Theory.

Volume (Year): 35 (2008)
Issue (Month): 2 (May)
Pages: 217-231

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Handle: RePEc:spr:joecth:v:35:y:2008:i:2:p:217-231
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  1. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
  2. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  3. Bisin, A. & Geanakoplos, J.D. & Gottardi, P. & Minelli, E. & Polemarchakis, H., 2011. "Markets and contracts," Journal of Mathematical Economics, Elsevier, vol. 47(3), pages 279-288.
  4. P. Dubey & J. Geanakoplos & M . Shubik, 2001. "Default and Punishment in General Equilibrium," Department of Economics Working Papers 01-07, Stony Brook University, Department of Economics.
  5. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
  6. Alessandro Citanna & Antonio Villanacci, 2004. "Pooling and endogenous market incompleteness," Economic Theory, Springer, vol. 24(3), pages 549-560, October.
  7. Sanford Grossman & Oliver Hart, 1978. "A theory of competitive equilibrium in stock market economies," Special Studies Papers 115, Board of Governors of the Federal Reserve System (U.S.).
  8. Grandmont, Jean-Michel, 1977. "Temporary General Equilibrium Theory," Econometrica, Econometric Society, vol. 45(3), pages 535-72, April.
  9. John Geanakoplos & Michael Magill & Martine Quinzii & J. Dreze, 1988. "Generic Inefficiency of Stock Market Equilibrium When Markets Are Incomplete," Cowles Foundation Discussion Papers 863, Cowles Foundation for Research in Economics, Yale University.
  10. Magill, Michael & Shafer, Wayne, 1991. "Incomplete markets," Handbook of Mathematical Economics, in: W. Hildenbrand & H. Sonnenschein (ed.), Handbook of Mathematical Economics, edition 1, volume 4, chapter 30, pages 1523-1614 Elsevier.
  11. Jacques Drèze & Enrico Minelli & Mario Tirelli, 2008. "Production and financial policies under asymmetric information," Economic Theory, Springer, vol. 35(2), pages 217-231, May.
  12. Alberto Bisin & Piero Gottardi, 1998. "Competitive Equilibria with Asymmetric Information," Levine's Working Paper Archive 2062, David K. Levine.
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