A further contribution of our model is that it analyzes how these incentives affect firms’ risk management decisions within the context of an industry equilibrium in which the equi- librium price is determined endogenously. Since the equilibrium output price is a function of aggregate investment and hedging decisions, a firm’s risk management choice is affected by the investment/hedging decisions of other firms in the industry. Specifically, firms gain more from additional investment when other firms in the industry invest less, which implies
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that a firm has an incentive to make risk management choices that transfer cash flows to those states in which its competitors are relatively cash constrained. This in turn implies that an individual firm’s incentive to hedge increases as more firms in the industry choose not to hedge and vice versa. As a result, an industry equilibrium can exist in which some firms hedge and others do not, even though all firms are ex ante identical.