Stock market, Corporate Finance

Let there be a village with two farmers, Tommy and Freddy. Tommy grows rice and Freddy grows cactus. When the weather is dry then Tommy's investment in cactus has an above average return and Freddy's investment in rice has a below average return. When there is a lot of rain the reverse is true: the cactus has below average return and the rice has above average return.

Suppose that a now a mini 'stock market' is introduced into this village where Tommy and Freddy can trade shares of their investment before the weather is decided. Depending on their risk-preferences will the introduction of this mini-stock market improve the welfare or both parties? Explain graphically or with a simple numerical example.

Posted Date: 3/9/2013 5:27:45 AM | Location : United States

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