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A bargaining theory of the firm

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  • Volker Britz

    ()

  • P. Herings

    ()

  • Arkadi Predtetchinski

    ()

Abstract

Suppose that a firm has several owners and that the future is uncertain in the sense that one out of many different states of nature will realize tomorrow. An owner’s time preference and risk attitude will determine the importance he places on payoffs in the different states. It is a well-known problem in the literature that under incomplete asset markets, a conflict about the firm’s objective function tends to arise among its owners. In this paper, we take a new approach to this problem, which is based on non-cooperative bargaining. The owners of the firm play a bargaining game in order to choose the firm’s production plan and a scheme of transfers which are payable before the uncertainty about the future state of nature is resolved. We analyze the resulting firm decision in the limit of subgame-perfect equilibria in stationary strategies. Given the distribution of bargaining power, we obtain a unique prediction for a production plan and a transfer scheme. When markets are complete, the production plan chosen corresponds to the profit-maximizing production plan as in the Arrow–Debreu model. Contrary to that model, owners typically do use transfers to redistribute profits. When markets are incomplete, the production plan chosen is almost always different from the one in a transfer-free Drèze (pseudo-)equilibrium and again owners use transfers to redistribute profits. Nevertheless, our results do support the Drèze criterion as the appropriate objective function of the firm. Copyright Springer-Verlag Berlin Heidelberg 2013

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Bibliographic Info

Article provided by Springer in its journal Economic Theory.

Volume (Year): 54 (2013)
Issue (Month): 1 (September)
Pages: 45-75

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Handle: RePEc:spr:joecth:v:54:y:2013:i:1:p:45-75

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Related research

Keywords: Strategic bargaining; Nash bargaining solution; Incomplete markets; Stock market equilibrium; Objective function of the firm; Profit-maximization; C78; D52;

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References

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  1. Stefano Demichelis & Klaus Ritzberger, 2011. "A general equilibrium analysis of corporate control and the stock market," Economic Theory, Springer, vol. 46(2), pages 221-254, February.
  2. Roth, Alvin E, 1989. " Risk Aversion and the Relationship between Nash's Solution and Subgame Perfect Equilibrium of Sequential Bargaining," Journal of Risk and Uncertainty, Springer, vol. 2(4), pages 353-65, December.
  3. Mich Tvede & Hervé Crès, 2004. "Voting in Assemblies of Shareholders and Incomplete Markets," Discussion Papers 04-09, University of Copenhagen. Department of Economics.
  4. Britz, Volker & Herings, P. Jean-Jacques & Predtetchinski, Arkadi, 2010. "Non-cooperative support for the asymmetric Nash bargaining solution," Journal of Economic Theory, Elsevier, vol. 145(5), pages 1951-1967, September.
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  7. Kelsey, David & Milne, Frank, 1996. "The existence of equilibrium in incomplete markets and the objective function of the firm," Journal of Mathematical Economics, Elsevier, vol. 25(2), pages 229-245.
  8. Hart, Sergiu & Mas-Colell, Andreu, 1996. "Bargaining and Value," Econometrica, Econometric Society, vol. 64(2), pages 357-80, March.
  9. Laruelle, Annick & Valenciano, Federico, 2007. "Bargaining in committees as an extension of Nash's bargaining theory," Journal of Economic Theory, Elsevier, vol. 132(1), pages 291-305, January.
  10. Egbert Dierker & Hildegard Dierker & Birgit Grodal, 2000. "Nonexistence of Constrained Efficient Equilibria when Markets are Incomplete," CIE Discussion Papers 2000-07, University of Copenhagen. Department of Economics. Centre for Industrial Economics.
  11. DeMarzo, Peter M, 1993. "Majority Voting and Corporate Control: The Rule of the Dominant Shareholder," Review of Economic Studies, Wiley Blackwell, vol. 60(3), pages 713-34, July.
  12. Grossman, Sanford J & Hart, Oliver D, 1979. "A Theory of Competitive Equilibrium in Stock Market Economies," Econometrica, Econometric Society, vol. 47(2), pages 293-329, March.
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