Abstract: A firm's production decisions are typically the result of a group decision process involving people with (possibly) conflicting interests. Modern corporations are generally organized are legal entities in which the ultimate authority belongs to their shareholders. It is to be expected then that a firm's production decisions reflect its shareholders' interests. In a complete markets economy, profit maximization by a perfectly competitive (price taking) firm is unanimously supported by its shareholders. Once the assumption of perfect competition is dropped, the conclusion is no longer true, which renders profit maximization a hard to justify objective for a firm with some market power.
This paper proposes an alternative objective for such a firm, called shareholders' wealth maximization (S-wealth maximization).S-wealth maximizing (SWM) production plans maximize shareholders'total wealth in the following sense: a plan y* is SWM if shareholders' wealth at y* is enough to buy, at prices prevailing in the market at y*, any of the aggregate consumption bundles that they would have obtained if the firm had made another choice. S-wealth maximization coincides with profit maximization if the firm is a price taker, it is independent of the price normalization chosen and respects shareholders' interests for all continuous and convex preferences. Respecting shareholders'interests is defined as the property of not selecting a production plan if another one is feasible and makes all shareholders better off (after a potential redistribution of their aggregate consumption bundle). We show that mixed strategy S-wealth maximizing production plans exist for all continuous, strictly monotonic and strictly convex preferences, as long as firm’s action set is compact.
Abstract: In an economy with incomplete financial markes, defining the objective of a privately owned firm poses difficulties due to firm’s double role as supplier of goods and provider of investment opportunities. Issuing common stock (and/or claims against it), a firm creates risk-hedg inginstruments whose payoffs may not be replicable by a portfolio of other traded securities. In that case, the existing markets do not provide a unique value for them and thus the firm’s market value is not well-defined. Moreover, when deciding the production-financial plans, the firm’s shareholders take into account not only the amount of dividends they receive but also the risk-hedging opportunities created by the financial policy. If markets are incomplete,people’s valuations of future income streams may differ, which generates the disagreement among controlling shareholders.
This paper proposes an objective for a publicly owned firm that acts in an incomplete markets environment. In a two-date economy with a finite number of states and one good per date/state, a firm chooses a production plan together with a way to finance it (by borrowing in the existing asset market or issuing new shares and/or securities). The firm’s objective is to maximize the so-called “adjusted value”, which takes into account not only the firm’s market value, but also shareholders’ surplus from their transactions under different asset structures. The choice respects unanimity among the firm’s controlling shareholders, even when they can make after-trade side payments at date 0. The firm’s financial policy is relevant (thus the Modigliani-Miller theorem does not hold). Typically, the equilibrium exhibits endogenously incomplete markets and is Pareto suboptimal. If the firm is competitive in financial markets, maximization of the adjusted value coincides with the Grossman-Hart objective. If the firm is competitive in financial as well as goods markets, then maximization of its adjusted value coincides with the market value maximization.
Abstract: A family of core extensions for cooperative TU-games is introduced. These solution concepts are non-empty when applied to non-balanced games yet coincide with the core whenever the core is non-empty. The extensions suggest how an exogenous regulator can sustain a stable and efficient outcome, financing a subsidy via individual taxes. Economic and geometric properties of the solution concepts are studied. When taxes are proportional, the proportional prenucleolus is proposed as a single-valued selection device. An application of these concepts to the decentralization of a public goods economy is discussed.
Abstract: Perfectly competitive (or price taking) behavior is believed to arise -- and is generally justified in the literature -- when the number of economic agents that interact in the market is large, and each agent is small relative to the whole economy. There are, however, examples that show how monopoly profits and inefficient allocations can persist in equilibrium, even with an arbitrarily large number of small, competing agents. In an environment without uncertainty (or with uncertainty but a complete set of contingent securities) this happens if, as the economy grows larger, the sequence of its (oligopolistic) equilibria approach a critical equilibrium point of the limit economy. The results of this paper point out yet another possible source of inefficiency in large economies: the firms' ownership structures. If firms follow an objective compatible with their shareholders' interests, the ownership structure plays an important role in achieving efficiency in the limit. By contrast, if firms maximize profits, the ownership structure is irrelevant for the limit behavior of the sequence of oligopolistic equilibria because a firm's profit function is independent of its ownership.
This paper analyses the limit behavior of sequences of oligopolistic equilibria in which firms follow objectives consistent to their shareholders' interests. It is shown that the efficiency of the limit allocation depends on consumers' distributions of ownership. An exact characterization of the class of ownership structures that lead to Walrasian equilibrium allocations in the limit is provided.
Abstract: We study the problem of allocating a bundle of perfectly divisible private goods from an axiomatic point of view, in situations where compensations can be made through monetary transfers. The key property we impose on the allocation rule requires that no agent should be able to gain by decomposing the problem into sequences of subproblems. Combined with additional standard and rather weak properties, it leads to a characterization of the rule that shares the total surplus equally. Hence a welfarist rule emerges as the unique consequence of our axioms phrased in a natural economic environment.