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Financial innovation, communication and the theory of the firm


Bettzüge, Marc Oliver; Hens, Thorsten (2014). Financial innovation, communication and the theory of the firm. Working paper series / Institute for Empirical Research in Economics No. 32, University of Zurich.

Abstract

When markets are incomplete, the competitive equilibria considered so far are not constrained Pareto–efficient, production efficiency breaks down and shareholders no longer agree on the objective function of the firm. We first show by way of an example that these inefficiencies can result from the double role of firms in incomplete markets: providing high market value and providing good hedging opportunities (spanning role). To disentangle these two conflicting roles of the firm’s decision, we then suggest to let the firm choose a relevant financial policy by issuing securities being collaterized by the production plan. In order to guarantee that the firm does not choose to innovate trivial assets, it is then shown to be crucial that the firm‘s shareholders agree on the same set of state prices. Therefore we introduce some communication network into the model which allows the shareholders to exchange their views on the firm’s best policies. In our main result we demonstrate that competitive equilibria with communication of shareholders and a relevant financial policy of the firm are Pareto–efficient, provided there are at least as many firms as there are shareholders.

When markets are incomplete, the competitive equilibria considered so far are not constrained Pareto–efficient, production efficiency breaks down and shareholders no longer agree on the objective function of the firm. We first show by way of an example that these inefficiencies can result from the double role of firms in incomplete markets: providing high market value and providing good hedging opportunities (spanning role). To disentangle these two conflicting roles of the firm’s decision, we then suggest to let the firm choose a relevant financial policy by issuing securities being collaterized by the production plan. In order to guarantee that the firm does not choose to innovate trivial assets, it is then shown to be crucial that the firm‘s shareholders agree on the same set of state prices. Therefore we introduce some communication network into the model which allows the shareholders to exchange their views on the firm’s best policies. In our main result we demonstrate that competitive equilibria with communication of shareholders and a relevant financial policy of the firm are Pareto–efficient, provided there are at least as many firms as there are shareholders.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Working Paper Series > Institute for Empirical Research in Economics (former)
Dewey Decimal Classification:330 Economics
Uncontrolled Keywords:theory of the firm, incomplete markets, communication, financial innovation
Language:English
Date:2014
Deposited On:29 Nov 2011 21:26
Last Modified:05 Apr 2016 15:10
Series Name:Working paper series / Institute for Empirical Research in Economics
ISSN:1424-0459
Related URLs:http://www.econ.uzh.ch/wp.html
Permanent URL: https://doi.org/10.5167/uzh-51934

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