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Corporate Investment under Uncertainty and Pareto Optimality in the Capital Markets

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  • Michael C. Jensen
  • John B. Long Jr.

Abstract

Within the context of a mean-variance equilibrium model of the pricing of capital assets, this paper investigates the allocation of investment in new risky opportunities which results from the collective behavior of firms, each of which attempts to maximize the net increase in its market value. This allocation is then compared to those allocations which (1) maximize nominal social wealth or (2) maximize social welfare. These comparisons are made under a variety of assumptions concerning the nature of the new opportunities, investor attitudes toward risk, and the number and characteristics of firms in the economy. With the exception of certain special cases, it is found that the private allocation of investment does not correspond to that which either maximizes social wealth or maximizes social welfare.

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Bibliographic Info

Article provided by The RAND Corporation in its journal Bell Journal of Economics.

Volume (Year): 3 (1972)
Issue (Month): 1 (Spring)
Pages: 151-174

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Handle: RePEc:rje:bellje:v:3:y:1972:i:spring:p:151-174

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Cited by:
  1. William J. Marshall & Jess B. Yawitz & Edward Greenberg, 1984. "Incentives for Diversification and the Structure of the Conglomerate Firm," NBER Working Papers 1280, National Bureau of Economic Research, Inc.

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