Owning Capital or Being Shareholders: An Equivalence Result with Incomplete Markets
Many recent papers in macroeconomics have studied the implications of models with household heterogeneity and incomplete financial markets under the assumption that households own the stock of physical capital and undertake the intertemporal investment decisions. In these models, production exhibits constant returns to scale, households maximize expected discounted utility, and firms rent capital and labor from households to maximize period by period profits. This paper considers the case in which infinitely lived firms, rather than households, make the intertemporal investment decisions. Under this assumption, it shows that there exists an objective function for firms that results in the same equilibrium allocation as in the standard setting with one period lived firms. The objective requires that firms maximize their asset value, which is defined as the discounted value of future cash flows using present value processes that do not allow for arbitrage opportunities. (Copyright: Elsevier)
Volume (Year): 13 (2010)
Issue (Month): 3 (July)
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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.:
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