Industry equilibrium with outside financing and moral hazard: Implications for market integration [An article from: European Economic Review]

This digital document is a journal article from European Economic Review, published by Elsevier in 2004. The article is delivered in HTML format and is available in your Amazon.com Media Library immediately after purchase. You can view it with any web browser.

Description:
In this paper, we study industry equilibrium under the assumptions that (1) firms need outside financing and (2) they have a moral hazard problem in taking potentially excessive risks. We characterize an industry equilibrium with credit rationing, where firms choose not to take risks, and compare this to the industry equilibrium in the absence of credit rationing. In both cases, we show that competition increases and prices decline as markets integrate. However, in markets with credit rationing there is typically more exit, a smaller decline in prices and, most strikingly, the market value of the industry increases rather than decreases.