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Equilibrium corporate finance and intermediation
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1725-6704
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EUI ECO; 2014/09
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BISIN, Alberto, GOTTARDI, Piero, RUTA, Guido, Equilibrium corporate finance and intermediation, EUI ECO, 2014/09 - https://hdl.handle.net/1814/32017
Abstract
This paper analyzes a class of competitive economies with production, incomplete nancial markets, and agency frictions. Firms take their production, nancing, and contractual decisions so as to maximize their value under rational conjectures. We show that competitive equilibria exist and that shareholders always unanimously support rms' choices. In addition, equilibrium allocations have well-de ned welfare properties: they are constrained e cient when information is symmetric, or when agency frictions satisfy certain speci c conditions. Furthermore, equilibria may display specialization on the part of identical rms and, when equilibria are constrained ine cient, may exhibit excessive aggregate risk. Financial decisions of the corporate sector are determined at equilibrium and depend not only on the nature of nancial frictions but also on the consumers' demand for risk. Financial intermediation and short sales are naturally accounted for at equilibrium.