Incentives and Risk Sharing in a Stock Market Equilibrium
AbstractEconomists hold two opposing views of the stock market: one focuses on the negative effect on incentives of separating ownership and control, the other emphasizes its beneficial role for risk sharing. Using a generalization of Diamond''s model which incorporates the effect of entrepreneurial incentives, we show how these two views can be reconciled. We introduce the concept of a stock market equilibrium with rational competitive price perceptions (RCPP) and show that such and equilibrium leads to a constrained optimal trade-off between risk sharing and incentives. We give examples showing the difference between RCPP equilibria and the standard CAPM type equilibria of finance.
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Bibliographic InfoPaper provided by University of California, Davis, Department of Economics in its series Working Papers with number 9612.
Date of creation: 08 Jan 2003
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Other versions of this item:
- Michael Magill & Martine Quinzii, . "Incentives And Risk Sharing In A Stock Market Equilibrium," Department of Economics 96-12, California Davis - Department of Economics.
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