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The role of initial shares in multi-period production economies with incomplete markets

Author

Listed:
  • Dierker, Egbert

    (Institute for Advanced Studies, Vienna, and Vienna Graduate School of Economics)

Abstract

This paper focuses on a single firm with constant returns to scale in a multi-period setting with incomplete markets and a single good per state. Profits vanish whenever the firm maximizes profits with respect to a given price system. The paper addresses the following question: Shall the firm always act as a price taker? In the case of a partnership, there are no initial shares and no profits accrue from production. A corporation, however, has initial shareholders and can sell its output at any price. An example shows that this additional freedom can improve efficiency and welfare. This results from the fact that a wedge between price and cost can mitigate the inefficiency caused by the consumers who disregard the impact of their initial portfolio decisions on subsequent markets.

Suggested Citation

  • Dierker, Egbert, 2017. "The role of initial shares in multi-period production economies with incomplete markets," Economics Series 327, Institute for Advanced Studies.
  • Handle: RePEc:ihs:ihsesp:327
    as

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    File URL: http://www.ihs.ac.at/publications/eco/es-327.pdf
    File Function: First version, 2017
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    More about this item

    Keywords

    Multi-period economies with incomplete markets; partnerships and corporations; competitive price perceptions; the role of initial shares; the objective of a firm; efficiency and social welfare;

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis

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