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|
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- Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, December.
- Leonard J. Mirman & Marc Santugini, 2008.
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Cahiers de recherche
08-05, HEC Montréal, Institut d'économie appliquée, revised Mar 2013.
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- Baron, David P, 1970. "Price Uncertainty, Utility, and Industry Equilibrium in Pure Competition," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 11(3), pages 463-480, October.
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