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
Citation
FESSELMEYER, Eric; MIRMAN, Leonard J.; and SANTUGINI, Marc.
Risk sharing in an asymmetric environment. (2014). International Review of Economics and Finance. 34, 1-8.
Available at: https://ink.library.smu.edu.sg/cis_research_all/6
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Additional URL
http://doi.org/10.1016/j.iref.2014.06.004
Included in
Entrepreneurial and Small Business Operations Commons, Finance and Financial Management Commons