Endogenous Asset Markets and Capital Structure in a General Equilibrium Model *

Abstract This paper proposes a general equilibrium model in which two types of agents are present. Managers have exclusive access to a unique production technology for which they seek financing. By proposing financing the manager determines the capital structure of investment. Consumers provide scarce funds in order to buy claims in the risky project and distribute wealth across states. Because of the possibility of default and the scarcity of funds we exhibit an endogenous asset structure. This endogeneity is created through non-feasibility of obtaining proper financing of the managers' project or the unwillingness of the manager to undertake the project