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Asset Markets and Investment Decisions

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Author Info
A. De Waegenaere (Tilburg University)
Heracles M. Polemarchakis (CORE, Universite Catholique de Louvain)
L. Ventura (Universita G. D'Annunzio)

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Abstract

In an incomplete asset market, firms assign values to investment plans by projecting their payoffs on the span of the payoffs of marketed assets; equivalently, firms employ the Capital Asset Pricing Model. This is a criterion that does not require firms to possess information, such as the marginal valuation of revenue across date -- events by shareholders, which is not observable; rather, it is based on information revealed by the prices and payoffs of marketed assets. Under standard assumptions, competitive equilibria exist. But, competitive equilibrium allocations need not satisfy a condition of constrained Pareto optimality that recognizes the incompleteness of the asset market; and, even in the absence of nominal assets, competitive equilibrium allocations are generically indeterminate -- they are determinate if firm consider the commodity payoffs of shares.

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File URL: http://cowles.econ.yale.edu/P/cd/d11a/d1147.pdf
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Publisher Info
Paper provided by Cowles Foundation, Yale University in its series Cowles Foundation Discussion Papers with number 1147.

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Length: 25 pages
Date of creation: Feb 1997
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Handle: RePEc:cwl:cwldpp:1147

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Related research
Keywords: Assets; profit; investment;

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Find related papers by JEL classification:
D46 - Microeconomics - - Market Structure and Pricing - - - Value Theory
D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets

References listed on IDEAS
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  1. Debreu, Gerard, 1970. "Economies with a Finite Set of Equilibria," Econometrica, Econometric Society, vol. 38(3), pages 387-92, May. [Downloadable!] (restricted)
  2. DeMarzo, Peter M, 1993. "Majority Voting and Corporate Control: The Rule of the Dominant Shareholder," Review of Economic Studies, Blackwell Publishing, vol. 60(3), pages 713-34, July. [Downloadable!] (restricted)
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