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Endogenous Firm Objectives

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  • Renström, Thomas I
  • Yalcin, Erkan
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    Abstract

    We analyse the behaviour of a monopolistic firm in general equilibrium when the firm’s decision are taken through shareholder voting. We show that, depending on the underlying distribution, rational voting may imply overproduction as well as underproduction, relative to the efficient level. Any initial distribution of shares is an equilibrium, if individuals do not recognize their influence on voting when trading shares. When they do, however, and there are no short-selling constraints the only equilibrium is the efficient one. With short-selling constraints typically underproduction occurs. It is not market power itself causing underproduction, but the inability to perfectly trade the rights to market power.

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    Bibliographic Info

    Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3361.

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    Date of creation: May 2002
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    Handle: RePEc:cpr:ceprdp:3361

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    Related research

    Keywords: imperfect competition; shareholder voting;

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    References

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    1. Renström, Thomas I. & Roszbach, Kasper, 1995. "Trade unions, employee share ownership and wage setting: A supply-side approach to the share economy," Working Paper Series in Economics and Finance 65, Stockholm School of Economics.
    2. 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.
    3. Sadanand, Asha B & Williamson, John M, 1991. "Equilibrium in a Stock Market Economy with Shareholder Voting," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(1), pages 1-35, February.
    4. Egbert Dierker & Birgit Grodahl, 1995. "Profit maximization mitigates competition," Economic Theory, Springer, vol. 7(1), pages 139-160.
    5. 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.
    6. Roemer, John E, 1993. " Would Economic Democracy Decrease the Amount of Public Bads?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 95(2), pages 227-38.
    7. Petra Geraats & Hans Haller, 1998. "Shareholders' choice," Journal of Economics, Springer, vol. 68(2), pages 111-135, June.
    8. Bohm Volker, 1994. "The Foundation of the Theory of Monopolistic Competition Revisited," Journal of Economic Theory, Elsevier, vol. 63(2), pages 208-218, August.
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    Cited by:
    1. Dirk Willenbockel, 2005. "The Price Normalisation Problem in General Equilibriun Models with Oligopoly Power: An Attempt at Perspective," GE, Growth, Math methods 0505002, EconWPA.
    2. David Kelsey & Frank Milne, 2006. "Externalities, Monopoly and the Objective Function of the Firm," Discussion Papers 0604, Exeter University, Department of Economics.

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