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A Consistent Firm Objective When Markets are Incomplete: Profit Maximization


  • Tarun Sabarwal


In economies with private firm ownership, when markets are incomplete, and firm shareholders change over time, there is no broad agreement on what ought to be a firm's objective. It is shown that ex-post, profit maximization is consistent with shareholder preferences in such economies; that is, along the equilibrium path, in every period and state of the world, every coalition of a firm's shareholders in that period and state approves a profit-maximizing production plan. This result is shown using natural assumptions about shareholder preferences and shareholder control, and it applies to cases when shareholders within a firm and across firms can form coalitions, and when stock trading can be ex-dividend or cum-dividend, and with a combination of both. This result can help provide a foundation for formulating a theory of the firm when markets are incomplete; a theory based on primitives of shareholder preferences and shareholder control that are to be necessarily satisfied in economies with private firm ownership.

Suggested Citation

  • Tarun Sabarwal, 2004. "A Consistent Firm Objective When Markets are Incomplete: Profit Maximization," Econometric Society 2004 North American Summer Meetings 141, Econometric Society.
  • Handle: RePEc:ecm:nasm04:141

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    References listed on IDEAS

    1. 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.
    2. Egbert Dierker & Hildegard Dierker & Birgit Grodal, 2002. "Nonexistence of Constrained Efficient Equilibria When Markets are Incomplete," Econometrica, Econometric Society, vol. 70(3), pages 1245-1251, May.
    3. Tarun Sabarwal, 2004. "On the Allocative Efficiency of Competitive Prices in Economies with Incomplete Markets," GE, Growth, Math methods 0410006, EconWPA.
    4. Dierker, Egbert & Grodal, Birgit, 1996. "Profit Maximization Mitigates Competition," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 7(1), pages 139-160, January.
    5. Joseph E. Stiglitz, 1982. "The Inefficiency of the Stock Market Equilibrium," Review of Economic Studies, Oxford University Press, vol. 49(2), pages 241-261.
    6. 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.
    7. 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.
    8. Duffie, Darrell & Shafer, Wayne, 1985. "Equilibrium in incomplete markets: I : A basic model of generic existence," Journal of Mathematical Economics, Elsevier, vol. 14(3), pages 285-300, June.
    9. 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.
    10. 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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    More about this item


    Incomplete Markets; Firm Objective; Profit Maximization; Shareholder Preferences;

    JEL classification:

    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets

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