PRODUCTION AND FINANCIAL POLICIES UNDER ASYMMETRIC INFORMATION.pdfVIP

* Manuscript Click here to download Manuscript: Dreze_Minelli_Tirelli.ps PRODUCTION AND FINANCIAL POLICIES UNDER ASYMMETRIC INFORMATION ` J.H. DREZE, E. MINELLI, AND M. TIRELLI Abstract. We propose an extension of the standard general equilibrium model with production and incomplete markets to situations in which (i) private in- vestors have limited information on the returns of specific assets, (ii) managers of firms have limited information on the preferences of individual shareholders. The extension is obtained by the assumption that firms are not traded directly but grouped into ‘sectorial’ funds. In our model the financial policy of the firm is not irrelevant. We establish the existence of equilibria and discuss the nature of the inefficiencies introduced by the presence of asymmetric information. We also illustrate the properties of the model in three simple examples. JEL Classification: D52, D81, D82. Introduction We introduce information asymmetries in the standard general equilibrium model with production and incomplete markets (see e.g. Geanakoplos at al. (1990)). In that model ,shares of