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Endogenous Firm Objectives

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  • Thomas Renstrom

    (University of Rochester)

  • Erkan Yalcin

    (Yeditepe University)

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    Abstract

    We analyze the behavior 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. However, when they do, 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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    File URL: http://128.118.178.162/eps/io/papers/0204/0204001.pdf
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    Bibliographic Info

    Paper provided by EconWPA in its series Industrial Organization with number 0204001.

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    Date of creation: 15 Apr 2002
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    Handle: RePEc:wpa:wuwpio:0204001

    Note: Type of Document - Tex; prepared on IBM PC; to print on HP;
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    Web page: http://128.118.178.162

    Related research

    Keywords: Imperfect Competition; Shareholder Voting; Politico Economic Equilibrium;

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    1. Dierker, Egbert & Grodal, Birgit, 1996. "Profit Maximization Mitigates Competition," Economic Theory, Springer, vol. 7(1), pages 139-60, January.
    2. 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.
    3. 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.
    4. 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.
    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.
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