Research Discussion Papers, Bank of Finland
Industry Equilibrium with Outside Financing and Moral Hazard: Effects of Market Integration
Abstract: In this paper we study industry equilibrium and the
effects of integration under the assumptions that 1) firms must use outside
financing and 2) they face a moral hazard problem due to the possibility of
taking excessive risks. These are typical features of banking and
insurance, for instance. We examine an industry equilibrium where firms
choose not to take excessive risks and compare this with the equilibrium in
industries that do not have a moral hazard problem. We show that, as
markets integrate, competition intensifies and prices fall in both types of
industry. In markets with moral hazard there are relatively more exits, a
smaller fall in prices and, contrary to the other case, the market value of
the industry increases.
Keywords: industry equilibrium; outside financing; risk-taking behaviour; market integration; (follow links to similar papers)
18 pages, December 31, 1999
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