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Integrating Real and Financial Decisions of the Firm

Author

Listed:
  • Leonard J. Mirman
  • Egas M. Salgueiro
  • Marc Santugini

Abstract

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.

Suggested Citation

  • Leonard J. Mirman & Egas M. Salgueiro & Marc Santugini, 2013. "Integrating Real and Financial Decisions of the Firm," Cahiers de recherche 1333, CIRPEE.
    • Handle: RePEc:lvl:lacicr:1333
    as

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    File URL: http://www.cirpee.org/fileadmin/documents/Cahiers_2013/CIRPEE13-33.pdf
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    References listed on IDEAS

    as
    1. Mirman, Leonard J. & Santugini, Marc, 2013. "Firms, shareholders, and financial markets," The Quarterly Review of Economics and Finance, Elsevier, vol. 53(2), pages 152-164.
    2. 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.
    3. Dotan, Amihud & Ravid, S Abraham, 1985. "On the Interaction of Real and Financial Decisions of the Firm under Uncertainty," Journal of Finance, American Finance Association, vol. 40(2), pages 501-517, June.
    4. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, December.
    5. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, March.
    6. Leonard J. Mirman & Neelam Jain, 2000. "Real and financial effects of insider trading with correlated signals," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 16(2), pages 333-353.
    7. Baron, David P, 1971. "Demand Uncertainty in Imperfect Competition," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 12(2), pages 196-208, June.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Existence of Equilibrium; Financial sector; Firm behavior; Market power; Monopoly; Nash equilibrium; Perfect competition; Publicly-traded firm; Risk aversion; Risk taking; Shareholder behavior; Stackelberg equilibrium;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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