Financial Innovation, Communication and the Theory of the Firm

Zurich IEER Working Paper No. 32

38 Pages Posted: 20 Jul 2000

See all articles by Marc Oliver Bettzuge

Marc Oliver Bettzuge

University of Zurich - Department of Economics; McKinsey & Co. Inc.

Thorsten Hens

University of Zurich - Department of Banking and Finance; Norwegian School of Economics and Business Administration (NHH); Swiss Finance Institute

Date Written: February 2000

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 originate in 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 beliefs. 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.

Keywords: theory of the firm, incomplete markets, communication, financial innovation

JEL Classification: D21, D52, G32, L21

Suggested Citation

Bettzuge, Marc Oliver and Hens, Thorsten, Financial Innovation, Communication and the Theory of the Firm (February 2000). Zurich IEER Working Paper No. 32. Available at SSRN: https://ssrn.com/abstract=230015 or http://dx.doi.org/10.2139/ssrn.230015

Marc Oliver Bettzuge

University of Zurich - Department of Economics

Zuerich, 8006
Switzerland

McKinsey & Co. Inc.

Konigsallee 60C
K-40027 Dusseldorf, Quebec
Germany

Thorsten Hens (Contact Author)

University of Zurich - Department of Banking and Finance ( email )

Plattenstrasse 32
Zurich, 8032
Switzerland
+41-44 634 37 06 (Phone)

Norwegian School of Economics and Business Administration (NHH)

Helleveien 30
Bergen, 5045
Norway

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Register to save articles to
your library

Register

Paper statistics

Downloads
418
Abstract Views
1,738
rank
69,676
PlumX Metrics