Industry equilibrium with outside financing and moral hazard: Implications for market integration

Matti Suominen*

*Corresponding author for this work

Research output: Contribution to journalArticleScientificpeer-review

1 Citation (Scopus)

Abstract

In this paper, we study industry equilibrium under the assumptions that (1) firms need outside financing and (2) they have a moral hazard problem in taking potentially excessive risks. We characterize an industry equilibrium with credit rationing, where firms choose not to take risks, and compare this to the industry equilibrium in the absence of credit rationing. In both cases, we show that competition increases and prices decline as markets integrate. However, in markets with credit rationing there is typically more exit, a smaller decline in prices and, most strikingly, the market value of the industry increases rather than decreases.

Original languageEnglish
Pages (from-to)1227-1241
Number of pages15
JournalEUROPEAN ECONOMIC REVIEW
Volume48
Issue number6
DOIs
Publication statusPublished - Dec 2004
MoE publication typeA1 Journal article-refereed

Keywords

  • Credit rationing
  • Industry equilibrium
  • Market integration
  • Risk-taking behavior

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