Output contingent securities and efficient investment by firms
We analyze competitive financial economies in which firms make risky investments. Unlike the classic Arrow--Debreu framing, firms and agents cannot contract upon the exogenous states of nature underlying production risks. The only available securities are equities and all possible derivatives written on the endogenous aggregate output. It is well-known that this financial structure is rich enough to promote efficient risk sharing across consumers. However, markets are incomplete from the production perspective, and the absence of market prices for each primitive state of nature raises issues on the objective of firms. By exploring an additional layer of rationality on firms' and agents' expectations, we show that asset prices convey sufficient information to compute a competitive shareholder value that leads to efficient investment by firms.
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References listed on IDEAS
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- Grossman, Sanford J & Hart, Oliver D, 1979. "A Theory of Competitive Equilibrium in Stock Market Economies," Econometrica, Econometric Society, vol. 47(2), pages 293-329, March.
- Allen, Franklin & Carletti, Elena & Marquez, Robert, 2007.
"Stakeholder capitalism, corporate governance and firm value,"
CFS Working Paper Series
2007/26, Center for Financial Studies (CFS).
- Franklin Allen & Elena Carletti & Robert Marquez, 2009. "Stakeholder Capitalism, Corporate Governance and Firm Value," Economics Working Papers ECO2009/10, European University Institute.
- Steinar Ekern & Robert Wilson, 1974. "On the Theory of the Firm in an Economy with Incomplete Markets," Bell Journal of Economics, The RAND Corporation, vol. 5(1), pages 171-180, Spring.
- Magill, Michael & Shafer, Wayne, 1991. "Incomplete markets," Handbook of Mathematical Economics,in: W. Hildenbrand & H. Sonnenschein (ed.), Handbook of Mathematical Economics, edition 1, volume 4, chapter 30, pages 1523-1614 Elsevier. Full references (including those not matched with items on IDEAS)
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