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Shareholder-efficient production plans in a multi-period economy

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  • DREZE, Jacques H.
  • LACHIRI, Oussama
  • MINELLI, Enrico

Abstract

We propose an objective for the firm in a general model of production economies extending over time under uncertainty and with incomplete markets. Trading in commodities and shares of stock occurssequentially on spot markets at all date-events. We derive the objective of the firm from the assumption of initial-shareholders efficiency.Each shareholder is assumed to communicate to the firm her marginal valuation of profits at all date events (expressed in terms of initial resources).In defining her own marginal valuation of the firm’s profits, a shareholder will take two elements into consideration. To evaluatethe direct impact of a change in dividends the shareholder uses her own vector of marginal rates of substitution for revenue across dateevents.In addition, the shareholder will take into account the impact of future dividends on the firm’s stock price when she trades shares. Topredict the effect on the stock price, she uses a (possibly different) state price process, her price theory. The only restriction that we imposeon consumers’ price theories is that they should be compatible with the observed equilibrium: given the equilibrium prices and productionplans, a price theory must satisfy a no-arbitrage condition. The firm computes its own shadow prices for profits at all date-events by simplyadding up the marginal valuations of all its initial shareholders. We prove existence of an equilibrium.

Suggested Citation

  • DREZE, Jacques H. & LACHIRI, Oussama & MINELLI, Enrico, 2007. "Shareholder-efficient production plans in a multi-period economy," LIDAM Discussion Papers CORE 2007082, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  • Handle: RePEc:cor:louvco:2007082
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    References listed on IDEAS

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    1. 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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    Cited by:

    1. Alberto Bisin & Gian Luca Clementi & Piero Gottardi, 2014. "Capital Structure and Hedging Demand with Incomplete Markets," NBER Working Papers 20345, National Bureau of Economic Research, Inc.
    2. Guido Ruta & Piero Gottardi, 2009. "Equilibrium corporate finance," 2009 Meeting Papers 149, Society for Economic Dynamics.
    3. Bisin, Alberto; & Gottardi, Piero; & Ruta, Guido, 2014. "Equilibrium corporate finance and intermediation," Economics Working Papers ECO2014/09, European University Institute.

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    More about this item

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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