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Shareholder-efficient production plans in a multi-period economy

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  • DREZE, Jacques H.
  • LACHIRI, Oussama
  • MINELLI, Enrico

Abstract

We propose an objective for the firm in a general model of production economies extending over time under uncertainty and with incomplete markets. Trading in commodities and shares of stock occurssequentially on spot markets at all date-events. We derive the objective of the firm from the assumption of initial-shareholders efficiency.Each shareholder is assumed to communicate to the firm her marginal valuation of profits at all date events (expressed in terms of initial resources).In defining her own marginal valuation of the firm’s profits, a shareholder will take two elements into consideration. To evaluatethe direct impact of a change in dividends the shareholder uses her own vector of marginal rates of substitution for revenue across dateevents.In addition, the shareholder will take into account the impact of future dividends on the firm’s stock price when she trades shares. Topredict the effect on the stock price, she uses a (possibly different) state price process, her price theory. The only restriction that we imposeon consumers’ price theories is that they should be compatible with the observed equilibrium: given the equilibrium prices and productionplans, a price theory must satisfy a no-arbitrage condition. The firm computes its own shadow prices for profits at all date-events by simplyadding up the marginal valuations of all its initial shareholders. We prove existence of an equilibrium.

Suggested Citation

  • DREZE, Jacques H. & LACHIRI, Oussama & MINELLI, Enrico, 2007. "Shareholder-efficient production plans in a multi-period economy," CORE Discussion Papers 2007082, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  • Handle: RePEc:cor:louvco:2007082
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    File URL: http://www.uclouvain.be/cps/ucl/doc/core/documents/coredp2007_82.pdf
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    References listed on IDEAS

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    1. Bonnisseau, Jean-Marc & Lachiri, Oussama, 2004. "On the objective of firms under uncertainty with stock markets," Journal of Mathematical Economics, Elsevier, vol. 40(5), pages 493-513, August.
    2. 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.
    3. Oussama Lachiri & Jean-Marc Bonnisseau, 2004. "Dreze's Criterion In A Multi-Period Economy With Stock Markets," Royal Economic Society Annual Conference 2004 88, Royal Economic Society.
    4. Geanakoplos, John, 1990. "An introduction to general equilibrium with incomplete asset markets," Journal of Mathematical Economics, Elsevier, vol. 19(1-2), pages 1-38.
    5. Bisin, Alberto, 1998. "General Equilibrium with Endogenously Incomplete Financial Markets," Journal of Economic Theory, Elsevier, vol. 82(1), pages 19-45, September.
    6. Dreze, Jacques H, 1985. "(Uncertainty and) the Firm in General Equilibrium Theory," Economic Journal, Royal Economic Society, vol. 95(380a), pages 1-20, Supplemen.
    7. Radner, Roy, 1972. "Existence of Equilibrium of Plans, Prices, and Price Expectations in a Sequence of Markets," Econometrica, Econometric Society, vol. 40(2), pages 289-303, March.
    8. 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.
    9. Geanakoplos, J. & Magill, M. & Quinzii, M. & Dreze, J., 1990. "Generic inefficiency of stock market equilibrium when markets are incomplete," Journal of Mathematical Economics, Elsevier, vol. 19(1-2), pages 113-151.
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    Cited by:

    1. Guido Ruta & Piero Gottardi, 2009. "Equilibrium corporate finance," 2009 Meeting Papers 149, Society for Economic Dynamics.
    2. Bisin, Alberto; & Gottardi, Piero; & Ruta, Guido, 2014. "Equilibrium corporate finance and intermediation," Economics Working Papers ECO2014/09, European University Institute.

    More about this item

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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