We develop an alternative approach to the general equilibrium analysis of a stochastic production economy when firms' choices of investment influence the probability distributions of their output. Using a normative approach we derive the criterion that a firm should maximize to obtain a Pareto optimal equilibrium: the criterion expresses the firm's contribution to the expected social utility of output, and is not the linear criterion of market value. If firms do not know agents utility functions, and are restricted to using the information conveyed by prices then they can construct an approximate criterion which leads to a second-best choice of investment which, in examples, is found to be close to the first best.
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Paper provided by University of California at Davis, Department of Economics in its series Working Papers with number
08-3.
References listed on IDEAS 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.:
Marshall, John M, 1976.
"Moral Hazard,"
American Economic Review,
American Economic Association, vol. 66(5), pages 880-90, December.
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