Publication Type

Journal Article

Version

publishedVersion

Publication Date

11-2014

Abstract

We study the effect of an asymmetric environment on risk sharing. In our model, entrepreneurs consider undertaking risky projects in the real sector as well as selling part of their projects to investors. To capture the idea of an asymmetric environment, the returns on the alternative risk-free investment are allowed to differ between the entrepreneurs and the investors, i.e., agents have different opportunity costs of participating in the risky projects. We first show that the presence of asymmetric options establishes links between the risk-free and risky sectors as well as between the real and financial sectors. In particular, an asymmetric environment implies that the amount of risk sharing depends on the risk-free rates and the expected return of the risky project. Moreover, the level of real investment also depends on the risk-free rates. Second, we show how different risk-free rates may encourage or discourage risk sharing, and even prevent risk sharing altogether. (C) 2014 Elsevier Inc. All rights reserved.

Keywords

Asymmetric options, Financial markets, Risk sharing, Risky project

Discipline

Entrepreneurial and Small Business Operations | Finance and Financial Management

Research Areas

Applied Microeconomics

Publication

International Review of Economics and Finance

Volume

34

First Page

1

Last Page

8

ISSN

1059-0560

Identifier

10.1016/j.iref.2014.06.004

Publisher

Elsevier

Additional URL

http://doi.org/10.1016/j.iref.2014.06.004

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