Production and financial policies under asymmetric information

Abstract

We propose an extension of the standard general equilibrium model with production and incomplete markets to situations in which (i) private investors have limited information on the returns of specific assets, (ii) managers of firms have limited information on the preferences of individual shareholders. The extension is obtained by the assumption that firms are not traded directly but grouped into 'sectorial' funds. In our model the financial policy of the firm is not irrelevant; we define a decision criterion for the firm that takes into account both its production and financial decisions. With this criterion, we prove the existence of equilibria. Then we discuss the nature of the inefficiencies introduced by the presence asymmetric information. In an appendix we illustrate the properties of the model in the CAPM framework. Abstract. We propose an extension of the standard general equilibrium model with production and incomplete markets to situations in which (i) private investors have limited information on the returns of specific assets, (ii) managers of firms have limited information on the preferences of individual shareholders. The extension is obtained by the assumption that firms are not traded directly but grouped into 'sectorial' funds. In our model the financial policy of the firm is not irrelevant; we define a decision criterion for the firm that takes into account both its production and financial decisions. With this criterion, we prove the existence of equilibria. Then we discuss the nature of the inefficiencies introduced by the presence asymmetric information. In an appendix we illustrate the properties of the model in the CAPM framework.

R&D Financing and Growth

“…Results The benchmark equilibrium is 'efficient' in the sense that it maximizes aggregate expected utilities, given the information available to each individual and market structure. At this equilibrium, returns to alternative investments and financial sources are equalized: 17 Exp.return to invest in firm 1 = R = Exp.return to invest in firm 2 16 The equilibrium algorithm is written in Mathematica and it is available on request. 17 Here the fund price q is computed as q = with the fund that is (voluntarily) not traded.…”

“…At this equilibrium, returns to alternative investments and financial sources are equalized: 17 Exp.return to invest in firm 1 = R = Exp.return to invest in firm 2 16 The equilibrium algorithm is written in Mathematica and it is available on request. 17 Here the fund price q is computed as q = with the fund that is (voluntarily) not traded. This implies efficiency of both production and R&D decisions: at equilibrium, capital freely flows across firms, so as to equate their expected returns and the returns to investing in innovation.…”

“…The use of 'pool' securities in competitive economies links our model to the literature on general equilibrium economies with asymmetric information (e.g. see Dubey Geanakoplos and Shubik, 2005, and, for production economies, Drèze, Minelli and Tirelli, 2008).…”

Equilibrium Corporate Finance

“…The uncertainty is described by the fact that at t = 1 one state s out of the set S = {1, ..., S} realizes. We assume for simplicity that there is a single type of firm in 9 Notable exceptions are Acharya and Bisin (2009), Magill and Quinzii (2002), Dreze et al (2008), Zame (2007, Prescott and Townsend (2006). 10 We do not discuss economies with adverse selection in this paper.…”

Efficient Allocations in Economies with Asymmetric Information When the Realized Frequency of Types is Common Knowledge

“…More specifically, incentive compatibility constraints limit the set of feasible allocations that can be attained (see, e.g., Dréze et al 2008). How are these restrictions relaxed as more information becomes common knowledge?…”