Government-Private Ownership Equilibrium with Incomplete Markets
This paper studies how financial-market incompleteness restricts the employment levels and capital use of private firms in a multi-sectoral production economy in which sectors experience idiosyncratic production shocks. In an economy in which private firms are replacing state firms as organizers of production, we show that incompleteness has the effect of perpetuating the productively inefficient state units at the cost of efficient private ones. The paper develops a general equilibrium model with incomplete markets (GEI) and private and state firms as potential producers of output and proves the existence of an equilibrium in which state firms exist with a positive size. With the help of numerical simulations, we study some of the qualitative properties of this government-private ownership equilibrium. In particular, we observe how employment levels in private firms (alternatively, state firms) vary with the number and types of financial assets traded and the agents' attitude towards risk.
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|Date of creation:||01 Mar 1999|
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Web page: http://fmwww.bc.edu/CEF99/
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