Inside Versus Outside Financing and Product Market Competition

CEPR Discussion Paper Series Number 2049

Posted: 31 Dec 1998

See all articles by Achim Wambach

Achim Wambach

ZEW – Leibniz Centre for European Economic Research; University of Mannheim; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Monika Schnitzer

University of Munich - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: December 1998

Abstract

This paper investigates the interaction of firms' financial structure and their competitive behaviour on oligopolistic product markets. We consider risk-averse entrepreneurs who produce with uncertain production costs. To reduce their exposure to risk they can sell stocks to risk-neutral outside-investors. We show that in equilibrium the entrepreneurs prefer not to fully transfer this risk to outside-financiers because it reduces the competitive pressure on the product market. Furthermore, we discuss how the optimal financial structure reacts to variations in entrepreneurs' risk aversion, the level of cost uncertainty and the number of competitors.

JEL Classification: D43, G32, L13, L22

Suggested Citation

Wambach, Achim and Schnitzer, Monika, Inside Versus Outside Financing and Product Market Competition (December 1998). CEPR Discussion Paper Series Number 2049. Available at SSRN: https://ssrn.com/abstract=142775

Achim Wambach

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

University of Mannheim ( email )

Universitaetsbibliothek Mannheim
Zeitschriftenabteilung
Mannheim, 68131
Germany

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Monika Schnitzer (Contact Author)

University of Munich - Department of Economics ( email )

Ludwigstrasse 28
Munich, D-80539
Germany
+49 89 2180 2217 (Phone)
+49 89 2180 2767 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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