When markets are incomplete, the competitive equilibria considered so far are not constrained Pareto-efficient, production efficiency breaks down and shareholders no longer agree on the objective function of the firm. We first show by way of an example that these inefficiencies originate in the double role of firms in incomplete markets: providing high market value and providing good hedging opportunities (spanning role). To disentangle these two conflicting roles of the firm's decision, we then suggest to let the firm choose a relevant financial policy by issuing securities being collaterized by the production plan. In order to guarantee that the firm does not choose to innovate trivial assets, it is then shown to be crucial that the firm`s shareholders agree on the same set of beliefs. Therefore we introduce some communication network into the model which allows the shareholders to exchange their views on the firm's best policies. In our main result we demonstrate that competitive equilibria with communication of shareholders and a relevant financial policy of the firm are Pareto- efficient, provided there are at least as many firms as there are shareholders.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Publisher Info
Paper provided by Institute for Empirical Research in Economics - IEW in its series IEW - Working Papers with number
iewwp032.