Integrating Real and Financial Decisions of the Firm

Leonard Mirman, Egas Salgueiro () and Marc Santugini

Cahiers de recherche from CIRPEE

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.

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 (search for similar items in EconPapers)
JEL-codes: D21 D42 D82 D83 D84 L12 L15 (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-com and nep-mic
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Persistent link: https://EconPapers.repec.org/RePEc:lvl:lacicr:1333

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