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Asset Markets and Investment Decisions

Listed author(s):
  • A. De Waegenaere

    (Tilburg University)

  • Heracles M. Polemarchakis

    (CORE, Universite Catholique de Louvain)

  • L. Ventura

    (Universita G. D'Annunzio)

In an incomplete asset market, firms assign values to investment plans by projecting their payoffs on the span of the payoffs of marketed assets; equivalently, firms employ the Capital Asset Pricing Model. This is a criterion that does not require firms to possess information, such as the marginal valuation of revenue across date -- events by shareholders, which is not observable; rather, it is based on information revealed by the prices and payoffs of marketed assets. Under standard assumptions, competitive equilibria exist. But, competitive equilibrium allocations need not satisfy a condition of constrained Pareto optimality that recognizes the incompleteness of the asset market; and, even in the absence of nominal assets, competitive equilibrium allocations are generically indeterminate -- they are determinate if firm consider the commodity payoffs of shares.

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Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1147.

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Length: 25 pages
Date of creation: Feb 1997
Publication status: Published in International Economic Review (2002), 43: 857-873
Handle: RePEc:cwl:cwldpp:1147
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  1. Debreu, Gerard, 1970. "Economies with a Finite Set of Equilibria," Econometrica, Econometric Society, vol. 38(3), pages 387-392, May.
  2. Peter M. DeMarzo, 1993. "Majority Voting and Corporate Control: The Rule of the Dominant Shareholder," Review of Economic Studies, Oxford University Press, vol. 60(3), pages 713-734.
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