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A Statitical Approach to General equilibrium with Production

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  • Martine Quinzii
  • Michael Magill

    (Department of Economics, University of California Davis)

Abstract

The paper studies a two-period stochastic economy in which a firm's investment influences the probability distribution of its profit. We take a normative approach, asking which criterion firms should maximize to obtain an equilibrium which is Pareto optimal. We find that a firm should maximize a non-linear function of its profit rather than its market value. We also study the role of prices at conveying the information that firms need in order to choose their investment optimally.

Suggested Citation

  • Martine Quinzii & Michael Magill, 2007. "A Statitical Approach to General equilibrium with Production," Working Papers 75, University of California, Davis, Department of Economics.
  • Handle: RePEc:cda:wpaper:07-5
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    File URL: http://wp.econ.ucdavis.edu/
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    References listed on IDEAS

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    1. Burkhard C. Schipper & Aviad Heifetz & Martin Meier, 2007. "Unawareness, Beliefs and Games," Working Papers 73, University of California, Davis, Department of Economics.
    2. Heifetz, Aviad, 2006. "The positive foundation of the common prior assumption," Games and Economic Behavior, Elsevier, vol. 56(1), pages 105-120, July.
    3. Burkhard C. Schipper & Aviad Heifetz & Martin Meier, 2007. "Unawareness, Beliefs and Games," Working Papers 73, University of California, Davis, Department of Economics.
    4. Feinberg, Yossi, 2000. "Characterizing Common Priors in the Form of Posteriors," Journal of Economic Theory, Elsevier, vol. 91(2), pages 127-179, April.
    5. Monderer, Dov & Samet, Dov, 1989. "Approximating common knowledge with common beliefs," Games and Economic Behavior, Elsevier, vol. 1(2), pages 170-190, June.
    6. Eddie Dekel & Barton L. Lipman & Aldo Rustichini, 1998. "Standard State-Space Models Preclude Unawareness," Econometrica, Econometric Society, vol. 66(1), pages 159-174, January.
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