Hostname: page-component-848d4c4894-8kt4b Total loading time: 0 Render date: 2024-06-28T02:37:36.175Z Has data issue: false hasContentIssue false
  • English
  • Français

A Mechanism for the Allocation of Corporate Investment

Published online by Cambridge University Press:  06 April 2009

Enrique R. Arzac
Get access Rights & Permissions [Opens in a new window]

Extract

Corporate investment in an economy without a complete set of contingent claims markets has the characteristic of a public good in the sense that the stockholders’ consumption planscannot be separated from, but depend on, the specific investment plans of the firms. Drèze [4] has shown that a constrained Pareto optimal (CPO) allocation of investment in a stock market economy must satisfy a generalization of the Samuelson [24] condition for efficient production of public goods: the investment plan should maximize a weighted sum of the stockholders’ personal valuations of future output minus current input cost. However, except for those special cases in which CPO investment plans are unanimously supported by stockholders (see [17], [20], and [2]), the theory of the firm in incomplete markets lacks a suitable maximization criterion. Although the Drèze-Samuelson condition is a most appealing candidate, it is not unanimously preferred by stockholders, each of whom prefers that his or her own valuation of future output receives all the weight in the investment decision. Furthermore, the application of the Drèze-Samuelson condition depends on the correct revelation of stockholders’ preferences, which, in the absence of special inducements, cannot be expected from economic agents.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 18 , Issue 2 , June 1983 , pp. 175 - 188
Copyright
Copyright © School of Business Administration, University of Washington 1983

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

[1]Arrow, K.J., and Hahn, F.H.. General Competitive Analysis. San Francisco, CA: Holden-Day (1971).Google Scholar
[2]Baron, D.P. “On the Relationship between Complete and Incomplete Market Models.” International Economic Review, Vol. 20 (02 1979), pp.105–117.CrossRefGoogle Scholar
[3]Bowen, H.R. “The Interpretation of Voting in the Allocation of Economic Resources.” Quarterly Journal of Economics. Vol. 57 (1943), pp.27–48.CrossRefGoogle Scholar
[4]Drèze, J.H. “Investment under Private Ownership: Optimality, Equilibrium and Stability.” In Allocation under Uncertainty: Equilibrium and Optimality, Dreze, J.H., ed., New York: John Wiley & Sons, Inc. (1974), pp. 129–166.CrossRefGoogle Scholar
[5]Drèze, J.H., and Poussin, D. de la Vallée. “A Tâatonnement Process for Public Goods.” Review of Economic Studies, Vol. 38 (04 1971), pp. 133–150.CrossRefGoogle Scholar
[6]Ekern, S., and Wilson, R.. “On the Theory of the Firm in an Economy with Incomplete Markets.” Bell Journal of Economics, Vol. 5 (1974), pp. 171–180.Google Scholar
[7]Forsythe, R., and Suchaneck, G.L.. “Collective Decision Mechanisms and Efficient Stock Market Allocation: Existence of a Participation Equilibrium.” Department of Economics, University of Iowa (1981).Google Scholar
[8]Gevers, L. “Competitive Equilibrium of the Stock Exchange and Pareto Efficiency.” In Allocation under Uncertainty: Equilibrium and Optimality, Drèze, J.H., ed., New York: John Wiley & Sons, Inc. (1974), pp. 167–191.CrossRefGoogle Scholar
[9]Green, J.R., and Laffont, J-J.. Incentives in Public Decision-Making. Amsterdam: North-Holland Publishing Co. (1979).Google Scholar
[10]Grossman, S.J. “A Characterization of the Optimality of Equilibrium in Incomplete Markets.” Journal of Economic Theory, Vol. 15 (06 1977), pp. 1–15.CrossRefGoogle Scholar
[11]Grossman, S.J., and Hart, O.D.. “A Theory of Competitive Equilibrium in Stock Market Economies.” Econometrica, Vol. 47 (03 1979), pp. 293–329.CrossRefGoogle Scholar
[12]Grossman, S.J., and Hart, O.D. “Take-Over Bids, the Free-Rider Problem and the Theory of the Corporation.” Bell Journal of Economics, Vol. 9 (1980). pp. 42–64.CrossRefGoogle Scholar
[13]Groves, T., and Ledyard, J.. “Optimal Allocation of Public Goods: A Solution to the ‘Free-Rider’ Problem.” Econometrica, Vol. 45 (05 1977), pp. 783–809.CrossRefGoogle Scholar
[14]Hart, O.D. “Take-Over Bids and Stock Market Equilibrium.” Journal of Economic Theory, Vol. 16 (10 1977), pp. 53–83.CrossRefGoogle Scholar
[15]Helpman, E., and Razin, A.. “Participation Equilibrium and the Efficiency of Stock Market Allocations.” International Economic Review, Vol. 19 (02 1978), pp. 129–140.CrossRefGoogle Scholar
[16]Henry, C. “On the Free-Rider Problem in the M.D.P. Procedure.” CORE Discussion Paper 7737, Universite Catholique de Louvain (1977).Google Scholar
[17]Leland, H.E. “Capital Markets, Production and Optimality: A Synthesis.” Technical Report No. 115, Institute for Mathematical Studies in the Social Sciences, Stanford University (1973).Google Scholar
[18]Malinvaud, E. “Procedures for the Determination of a Program of Collective Consumption.” European Economic Review, Vol. 2 (1970–1971), pp. 187–217.CrossRefGoogle Scholar
[19]Malinvaud, E. “Prices for Individual Consumption, Quantity Indicators for Collective Consumption.” Review of Economic Studies, Vol. 39 (1972), pp. 385–405.CrossRefGoogle Scholar
[20]Mossin, J.The Economic Efficiency of Financial Markets. Lexington, MA: Lexington Books (1977).Google Scholar
[21]Muench, T., and Walker, M.. “Identifying the Free-Rider Problem.” In Aggregation andRevelation of Preferences, Laffont, J-J, ed., Amsterdam: North-Holland Publishing Co. (1979).Google Scholar
[22]Ross, S.A. “Options and Efficiency.” Quarterly Journal of Economics, Vol. 90 (02 1976), pp. 75–89.CrossRefGoogle Scholar
[23]Rubinstein, M. “An Aggregation Theorem for Securities Markets.” Journal of Financial Economics, Vol. 1 (1974), pp. 225–244.CrossRefGoogle Scholar
[24]Samuelson, P.A. “The Pure Theory of Public Expenditures.” Review of Economics and Statistics, Vol. 36 (1954), pp. 387–389.CrossRefGoogle Scholar
[25]Satterthwaite, M.A. “On the Scope of Stockholder Unanimity Theorems.” International Economic Review, Vol. 22 (02 1981), pp. 119–133.CrossRefGoogle Scholar
[26]Smith, V.L. “The Principle of Unanimity and Voluntary Consent in Social Choice.” Journal of Political Economy, Vol. 85 (12 1977), pp. 1125–1139.CrossRefGoogle Scholar
[27]Smith, V.L. “An Experimental Comparison of Three Public Good Decision Mechanisms.” Scandinavian Journal of Economics, Vol. 81 (1979), pp. 198–215.CrossRefGoogle Scholar
[28]Townsend, R.M. “Optimal Contracts in Competitive Markets with Costly State Verification.” Journal of Economic Theory, Vol. 21 (10 1979), pp. 265–293.CrossRefGoogle Scholar
[29]Walker, M. “A Simple Incentive Compatible Scheme for Attaining Lindahl Allocations: A Non-Confiscatory Solution to the Free-Rider Problem.” Econometrica, Vol. 49 (01 1981), pp. 65–72.CrossRefGoogle Scholar