IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

Shareholders Unanimity With Incomplete Markets

Listed author(s):
  • Daniele Coen-Pirani
  • Eva Carceles-Poveda

Macroeconomic models with heterogeneous agents and incomplete markets (e.g. Krusell and Smith, 1998) usually assume that consumers, rather than firms, own and accumulate physical capital. This assumption, while convenient, is without loss of generality only if the asset market is complete. When financial markets are incomplete, shareholders will in general disagree on the optimal level of investment to be undertaken by the firm. This paper derives conditions under which shareholders unanimity obtains in equilibrium despite the incompleteness of the asset market. In the general equilibrium economy analyzed here consumers face idiosyncratic labor income risk and trade firms' shares in the stock market. A firm's shareholders decide how much of its earnings to invest in physical capital and how much to distribute as dividends. The return on a firm's capital investment is affected by an aggregate productivity shock. The paper contains two main results. First, if the production function exhibits constant returns to scale and short-sales constraints are not binding, then in a competitive equilibrium a firm's shareholders will unanimously agree on the optimal level of investment. Thus, the allocation of resources in this economy is the same as in an economy where consumers accumulate physical capital directly. Second, when short-sales constraints are binding, instead, the unanimity result breaks down. In this case, constrained shareholders prefer a higher level of investment than unconstrained ones.

If you experience problems downloading a file, check if you have the proper application to view it first. 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.

File URL:
Download Restriction: no

Paper provided by Carnegie Mellon University, Tepper School of Business in its series GSIA Working Papers with number 2005-E13.

in new window

Date of creation:
Handle: RePEc:cmu:gsiawp:1109532697
Contact details of provider: Postal:
Tepper School of Business, Carnegie Mellon University, 5000 Forbes Avenue, Pittsburgh, PA 15213-3890

Web page:

Order Information: Web:

No references listed on IDEAS
You can help add them by filling out this form.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:cmu:gsiawp:1109532697. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Steve Spear)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.