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Hedging to market‐wide shocks and competitive selection
Author(s) -
Friberg Richard,
Kupersmidt Isak Trygg
Publication year - 2022
Publication title -
journal of economics and management strategy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.672
H-Index - 68
eISSN - 1530-9134
pISSN - 1058-6407
DOI - 10.1111/jems.12504
Subject(s) - hedge , odds , shock (circulatory) , competition (biology) , economics , margin (machine learning) , marginal cost , sunk costs , selection (genetic algorithm) , microeconomics , monetary economics , logistic regression , medicine , ecology , machine learning , artificial intelligence , computer science , biology
This paper examines hedging against a large market‐wide shock in a model with heterogeneous firms and sunk costs of entry. If hedging is voluntary only the most efficient firms hedge against this shock, a finding in line with empirical evidence but at odds with standard motivations for risk management. Hedging affects the critical level of the marginal cost needed to operate in the market. A setting with mandatory hedging is associated with stronger competition than when hedging is voluntary which, in turn, is associated with stronger competition than when hedging is unavailable.