Equilibrium corporate finance and intermediation

Alberto Bisin, Piero Gottardi and Guido Ruta

No ECO2014/09, Economics Working Papers from European University Institute

Abstract: This paper analyzes a class of competitive economies with production, incomplete financial markets, and agency frictions. Firms take their production, financing, and contractual decisions so as to maximize their value under rational conjectures. We show that competitive equilibria exist and that shareholders always unanimously support firms' choices. In addition, equilibrium allocations have well-defined welfare properties: they are constrained efficient when information is symmetric, or when agency frictions satisfy certain specific conditions. Furthermore, equilibria may display specialization on the part of identical firms and, when equilibria are constrained inefficient, may exhibit excessive aggregate risk. Financial decisions of the corporate sector are determined at equilibrium and depend not only on the nature of financial frictions but also on the consumers' demand for risk. Financial intermediation and short sales are naturally accounted for at equilibrium.

Keywords: Capital structure; Competitive equilibria; Incomplete markets; Asymmetric information (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-cta and nep-mic
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Citations: View citations in EconPapers (4)

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Related works:
Working Paper: Equilibrium Corporate Finance and Intermediation (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:eui:euiwps:eco2014/09

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