The Impossibility of Efficient Decision Rules for Firms in Competitive Stock Market Economies

Considerable attention has been focused recently on models of firms under uncertainty in which there is an incomplete set of securities markets. In these models, each firm can issue only one security and consumers can generate consumption plans only through the purchase of firms' securities. Consequently, if the economy is competitive, each stockholder of a firm will impute the same value to the firm in equilibrium, where this value is given by the market price of the firm's security. However, stockholders will not, in general, have the same implicit prices for state-contingent consumption. Since the financial market is said to be incomplete if the number of independent securities is less than the number of states of nature, consumers cannot hedge perfectly, whichimplies that unconstrained Pareto-optimal allocations are not generally attainable (see [2] and [3]). Finally, it is unclear what firms' objectives should be in these models because profit maximization is not well defined; firms' profits in different states cannot be aggregated into a single index. It is still generally accepted, however, that firms should operate in their own stockholders'interests, a necessary condition for allocative efficiency.