We develop simple models in which corporate governance affects the
financing and the production level of firms. In this paper, better corporate governance
implies governance under which a smaller firm value can be expropriated by the
manager, ceteris paribus. We assume that the potential expropriation can occur after
production. In the single firm model, we investigate how corporate governance affects
the financing and the production selection of a firm. In the competition models, we
investigate the effect of governance on competition as well as on financing and
production in settings of Cournot duopoly and competition. The main results of the
analyses include: (1) Firms may produce more under worse governance. (2) Worse
governance may enhance firm value. (3) Worse governance may be associated with
higher competition. (4) Socially optimal governance is worse than firm value
maximizing governance.
Keywords: corporate governance, ownership, production, duopoly, competition
JEL Classification: G320, G340, D430
