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Optimal Financial Structure and Asset Prices

Author

Listed:
  • Johan Hombert

    (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique)

Abstract

I study the welfare properties of competitive equilibria in an economy with financial frictions. In the model, entrepreneurs raise funds to set up a firm, then they exert effort, and finally they trade assets. Private financial contracts do not internalize their impact on asset prices. On the one hand, lower prices depress the liquidation value - the collateral effect. On the other hand, lower prices boost entrepreneurs' incentives to achieve good performance - the incentive effect. I show that the latter effect outweighs the former, implying that a decrease in asset prices improves welfare.

Suggested Citation

  • Johan Hombert, 2012. "Optimal Financial Structure and Asset Prices," Working Papers hal-00760750, HAL.
    • Handle: RePEc:hal:wpaper:hal-00760750
    as

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