Industry Equilibrium With Outside Financing and Moral Hazard: Effects of Market Integration

18 Pages Posted: 14 Oct 2007

See all articles by Matti Suominen

Matti Suominen

Aalto University School of Business

Date Written: December 31, 1999

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

Suggested Citation

Suominen, Matti, Industry Equilibrium With Outside Financing and Moral Hazard: Effects of Market Integration (December 31, 1999). Bank of Finland Research Discussion Paper No. 23/1999, Available at SSRN: https://ssrn.com/abstract=1021200 or http://dx.doi.org/10.2139/ssrn.1021200

Matti Suominen (Contact Author)

Aalto University School of Business ( email )

PO Box 1210
FI-00101 Helsinki
Finland
+358-50-5245678 (Phone)

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
60
Abstract Views
704
Rank
643,430
PlumX Metrics