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Owning Capital or Being Shareholders: An Equivalence Result with Incomplete Markets

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Author Info

  • Eva Carceles-Poveda

    (SUNY Stony Brook)

  • Daniele Coen Pirani

    (Carnegie Mellon University)

Abstract

Many recent papers in macroeconomics have studied the implications of models with household heterogeneity and incomplete financial markets under the assumption that households own the stock of physical capital and undertake the intertemporal investment decisions. In these models, production exhibits constant returns to scale, households maximize expected discounted utility, and firms rent capital and labor from households to maximize period by period profits. This paper considers the case in which infinitely lived firms, rather than households, make the intertemporal investment decisions. Under this assumption, it shows that there exists an objective function for firms that results in the same equilibrium allocation as in the standard setting with one period lived firms. The objective requires that firms maximize their asset value, which is defined as the discounted value of future cash flows using present value processes that do not allow for arbitrage opportunities. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2009.08.001
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Bibliographic Info

Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 13 (2010)
Issue (Month): 3 (July)
Pages: 537-558

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Handle: RePEc:red:issued:08-124

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Related research

Keywords: Incomplete markets; Firm objectives; Value maximization;

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References

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  1. Manuel S. Santos & Michael Woodford, 1993. "Rational Asset Pricing Bubbles," Working Papers 9304, Centro de Investigacion Economica, ITAM.
  2. Leland, Hayne E, 1972. "Theory of the Firm Facing Uncertain Demand," American Economic Review, American Economic Association, vol. 62(3), pages 278-91, June.
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Cited by:
  1. Anagnostopoulos, Alexis & Cárceles-Poveda, Eva & Lin, Danmo, 2012. "Dividend and capital gains taxation under incomplete markets," Journal of Monetary Economics, Elsevier, vol. 59(7), pages 599-611.

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