Theory of the Firm: Bargaining and Competitive Equilibrium
AbstractSuppose 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 standard notion of competitive 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.
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Bibliographic InfoPaper provided by Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization in its series Research Memoranda with number 057.
Date of creation: 2010
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Web page: http://www.maastrichtuniversity.nl/web/UMPublications.htm
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-11-27 (All new papers)
- NEP-BEC-2010-11-27 (Business Economics)
- NEP-GTH-2010-11-27 (Game Theory)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Jacques Drèze & Oussama Lachiri & Enrico Minelli, 2009.
"Stock Prices, Anticipations and Investment in General Equilibrium,"
0916, University of Brescia, Department of Economics.
- DREZE, Jacques H. & LACHIRI, Oussama & MINELLI, Enrico, 2009. "Stock prices, anticipations and investment in general equilibrium," CORE Discussion Papers 2009083, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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