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Incentives And Risk Sharing In A Stock Market Equilibrium

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  • Michael Magill
  • Martine Quinzii

Abstract

Economists hold two opposing views of the stock market: one focuses on the negative effect on incentives of separating ownership and control, the other emphasizes its beneficial role for risk sharing. Using a generalization of Diamond's model which incorporates the effect of entrepreneurial incentives, we show how these two views can be reconciled. We introduce the concept of a stock market equilibrium with rational competitive price perceptions (RCPP) and show that such and equilibrium leads to a constrained optimal trade-off between risk sharing and incentives. We give examples showing the difference between RCPP equilibria and the standard CAPM type equilibria of finance.

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Bibliographic Info

Paper provided by California Davis - Department of Economics in its series Department of Economics with number 96-12.

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Handle: RePEc:fth:caldec:96-12

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Postal: University of California Davis - Department of Economics. One Shields Ave., California 95616-8578
Phone: (530) 752-0741
Fax: (530) 752-9382
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Web page: http://www.econ.ucdavis.edu/
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Cited by:
  1. Peter Bossaerts & Caroline Fohlin, 2000. "Universal Banking and the Pricing of Securities Risk: Historical Evidence from Germany," Econometric Society World Congress 2000 Contributed Papers 1596, Econometric Society.
  2. Kocherlakota, Narayana R., 1998. "The effects of moral hazard on asset prices when financial markets are complete," Journal of Monetary Economics, Elsevier, vol. 41(1), pages 39-56, February.
  3. Guido Ruta & Piero Gottardi, 2009. "Equilibrium corporate finance," 2009 Meeting Papers 149, Society for Economic Dynamics.
  4. Wagner, W.B., 2002. "Divestment, Entrepreneurial Incentives and the Decision to go Public," Discussion Paper 2002-47, Tilburg University, Center for Economic Research.
  5. Alberto Bisin & Piero Gottardi, 2000. "Decentralizing Incentive Efficient Allocations of Economies with Adverse Selection," Econometric Society World Congress 2000 Contributed Papers 0855, Econometric Society.
  6. Wagner, W.B., 2000. "Decentralized International Risk Sharing and Governmental Moral Hazard," Discussion Paper 2000-92, Tilburg University, Center for Economic Research.
  7. Sunanda Roy, 2000. "Risk Sharing through Labor Contracts - Risk Aversion, Market Incompleteness and Employment," Econometric Society World Congress 2000 Contributed Papers 1767, Econometric Society.

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