Competition of risk-averse and risk-neutral financial chains under government policy-making

Document Type : Research Paper

Authors

1 College of Industrial Engineering, South Tehran Branch, Islamic Azad University, Tehran, Iran

2 School of Industrial Engineering, Iran University of Science and Technology, Tehran, Iran

3 ICT Research Institute, Iran Telecommunication Research Center, Tehran, Iran

Abstract

This research analyzes the competition of two risk-neutral and risk-averse centralized financial chains (FCs) while the government regulates the market to prevent the disproportionately costly interest rates by eliminating unreasonable arbitration of transactions. Each FC consists of an investor and a broker, helping to fund the financial needs of the capital-constrained firms. Utilizing the Stackelberg game theory method, we formulate two-level and three-level optimization models for four potential scenarios and create an integrative structure for evaluating scenarios through the perspectives of both FCs’ risk orientations (i.e. risk-neutral and risk-averse) and two policies of the government (i.e., deregulation and regulation to mitigate the effect of arbitration). We found that under the government’s regulation policy, risk-averse FCs cause a lower amount of arbitration than risk-neutral FCs. We also realized that the increased volume of risk-free interest rate results in less arbitration. Results also demonstrate that the regulator can organize the competing FCs in the market by enforcing limits on interest rate and restricting costly interest rates by controlling the impacts of arbitration, which ensures a steady economy and encourages the funding of capital-constrained businesses.

Keywords

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Journal of Industrial and Systems Engineering
Volume 13, Issue 1 - Serial Number 1
January 2020
Pages 147-162

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History

  • Receive Date: 26 March 2020
  • Revise Date: 13 May 2020
  • Accept Date: 08 June 2020

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