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Endogenous Firm Objectives

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  • Erkan YalÁin

    ()
    (Yeditepe University)

  • Thomas I. Renstr–m

    ()
    (University of Rochester and CEPR)

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    Abstract

    We analyze the behavior of a monopolistic firm in general equilibrium when the firm's decisions are taken through shareholder voting. We show that, depending on the underlying distribution, rational voting may imply overproduction as well as underproduction, relative to the efficient level. Any initial distribution of shares is an equilibrium, if individuals do not recognize their influence on voting when trading shares. However, when they do, and there are no short-selling constraints, the only equilibrium is the efficient one. With short-selling constraints typically underproduction occurs. It is not market power itself causing underproduction, but the inability to perfectly trade the rights to market power. Copyright 2003 Blackwell Publishing, Inc..

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    Bibliographic Info

    Article provided by Association for Public Economic Theory in its journal Journal of Public Economic Theory.

    Volume (Year): 5 (2003)
    Issue (Month): 1 (01)
    Pages: 67-94

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    Handle: RePEc:bla:jpbect:v:5:y:2003:i:1:p:67-94

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    Cited by:
    1. Dirk Willenbockel, 2005. "The Price Normalisation Problem in General Equilibriun Models with Oligopoly Power: An Attempt at Perspective," GE, Growth, Math methods 0505002, EconWPA.
    2. Stefano Demichelis & Klaus Ritzberger, 2007. "Corporate Control and the Stock Market," Carlo Alberto Notebooks 60, Collegio Carlo Alberto.
    3. Frank Milne & David Kelsey, 2006. "Takeovers and Cooperatives," Working Papers 1113, Queen's University, Department of Economics.
    4. David Kelsey & Frank Milne, 2006. "Externalities, monopoly and the objective function of the firm," Economic Theory, Springer, vol. 29(3), pages 565-589, November.
    5. Frank Milne & David Kelsey, 2006. "Imperfect Competition and Corporate Governance," Working Papers 1079, Queen's University, Department of Economics.
    6. David Kelsey & Frank Milne, 2010. "Takeovers and cooperatives: governance and stability in non-corporate firms," Journal of Economics, Springer, vol. 99(3), pages 193-209, April.
    7. Petra Geraats & Hans Haller, 1998. "Shareholders' choice," Journal of Economics, Springer, vol. 68(2), pages 111-135, June.

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