Integrating Real and Financial Decisions of the Firm
We study the issue of integrating real and financial decisions in a monopoly firm with risk-averse decision-makers. To that end, we combine the decisions of the firm and of the shareholders in a very simple but robust model, with uncertainty in the real market and CARA preferences. We show the existence of equilibrium either in a competitive and a uncompetitive financial market, though different assumptions are needed in each case. In all situations, access to the financial market leads to risk-sharing and an increase in production, but only the competitive case is Pareto optimal. When either the firm or the outside investors act as leaders, the optimal risk-sharing is distorted to favor the leader. We also discuss the effect that changes on the coefficients of risk aversion have on the equilibrium outcomes.
|Date of creation:||2013|
|Date of revision:|
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- Leonard J. Mirman & Marc Santugini, 2008.
"Firms, Shareholders, and Financial Markets,"
Cahiers de recherche
08-05, HEC Montréal, Institut d'économie appliquée, revised Mar 2013.
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