IDEAS home Printed from
   My bibliography  Save this paper

Wealth Effects


  • Patrick Legros
  • Andrew F. Newman


We construct a general equilibrium model of firm formation in which organization is endogenous. Incentive-based wealth effects arises from lower bounds on wealth and utility, and these affect the way in which different organizational forms can divide the proceeds of production. Individuals may choose between organizaing their firms as hierarchies or as partnerships; these decisions are mediated by agency costs in both labor and financial markets. The type of organization which emerges depends on the distribution of wealth and need not be surplus maximizing: the same output could be produced with less labor if some firms were forced to reorganize from their equilibrium form. This result suggests that instead of serving to provide incentives efficiently, organizations may sometimes act to transfer surplus from some agents to others, at potential social cost.

Suggested Citation

  • Patrick Legros & Andrew F. Newman, 1992. "Wealth Effects," Discussion Papers 1024, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  • Handle: RePEc:nwu:cmsems:1024

    Download full text from publisher

    File URL:
    File Function: main text
    Download Restriction: no

    References listed on IDEAS

    1. Itzhak Gilboa & David Schmeidler, 1995. "Case-Based Decision Theory," The Quarterly Journal of Economics, Oxford University Press, vol. 110(3), pages 605-639.
    2. Itzhak Gilboa, 1991. "Rationality and Ascriptive Science," Discussion Papers 943, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    Full references (including those not matched with items on IDEAS)


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. John P. Conley & Myrna Holtz Wooders, 1998. "The Tiebout Hypothesis: On the Existence of Pareto Efficient Competitive Equilibrium," Working Papers mwooders-98-06, University of Toronto, Department of Economics.
    2. Piketty, Thomas, 2000. "Theories of persistent inequality and intergenerational mobility," Handbook of Income Distribution,in: A.B. Atkinson & F. Bourguignon (ed.), Handbook of Income Distribution, edition 1, volume 1, chapter 8, pages 429-476 Elsevier.
    3. Nugent, Jeffrey B & Robinson, James A, 2002. "Are Endowments Fate?," CEPR Discussion Papers 3206, C.E.P.R. Discussion Papers.
    4. Rocco Macchiavello, 2007. "Vertical Integration, Missing Middle and Investor Protection in Developing Countries," Economics Series Working Papers 373, University of Oxford, Department of Economics.
    5. Maitreesh Ghatak & Massimo Morelli & Tomas Sjoström, 2001. "Credit rationing, wealth inequality, and allocation of talent," ICER Working Papers - Applied Mathematics Series 23-2001, ICER - International Centre for Economic Research.
    6. Edward Simpson Prescott & Robert M. Townsend, 2006. "Firms as Clubs in Walrasian Markets with Private Information," Journal of Political Economy, University of Chicago Press, vol. 114(4), pages 644-671, August.
    7. Mark S. Carey & Stephen D. Prowse & John Rea & Gregory F. Udell, 1993. "The economics of the private placement market," Staff Studies 166, Board of Governors of the Federal Reserve System (U.S.).
    8. Abhijit Banarjee, 2000. "The Two Poverties," Nordic Journal of Political Economy, Nordic Journal of Political Economy, vol. 26, pages 129-141.

    More about this item


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nwu:cmsems:1024. 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: (Fran Walker). General contact details of provider: .

    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.

    We have no references for this item. You can help adding them by using 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.