OUTPUT CONTINGENT SECURITIES AND EFFICIENT INVESTMENT BY FIRMS

We analyze competitive economies with risky investments. Unlike the classic Arrow-Debreu framing, firms and agents cannot contract upon the exogenous states underlying production risks. They can trade equities and any security written on the endogenous aggregate output. This financial structure is r...

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Bibliographic Details
Published inInternational economic review (Philadelphia) Vol. 59; no. 2; pp. 989 - 1012
Main Authors Braido, Luis H. B., Martins-da-Rocha, V. Filipe
Format Journal Article
LanguageEnglish
Published Philadelphia Wiley Periodicals, Inc 01.05.2018
Blackwell Publishing Ltd
Wiley
Subjects
Companies
Competition
Consumers
Economic models
Economic theory
Economics and Finance
Endogenous
Humanities and Social Sciences
Investments
Markets
Prices
Risk sharing
CAPM
Endogenous risk
Efficiency
Incomplete markets
Production
Competitive equilibrium
Investment
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Summary:We analyze competitive economies with risky investments. Unlike the classic Arrow-Debreu framing, firms and agents cannot contract upon the exogenous states underlying production risks. They can trade equities and any security written on the endogenous aggregate output. This financial structure is rich enough to promote efficient risk sharing among consumers. However, markets are incomplete from the production perspective, and the absence of prices for each primitive state of nature raises the question about the objective of firms. We show that output-contingent asset prices convey sufficient information to compute the competitive shareholder value that leads to efficient investment by firms.
Bibliography:This article has benefited from insightful interactions with Piero Gottardi, Michael Magill, Herakles Polemarchakis, Martine Quinzii, and Paolo Siconolfi. We are also thankful to comments from Yves Balasko, Alessandro Citanna, Jan Eeckhout, John Geanakoplos, Jayant Ganguli, Christian Ghiglino, Zhiguo He, Felix Kubler, Karl Shell, Stephen Spear, Jan Werner, and seminar participants at the Cowles Foundation, Exeter Business School, Sao Paulo School of Economics, Université Paris‐Dauphine, University of York, Econometric Society Meetings at Malaga and Evanston, and NSF/NBER/CEME Conference at Indiana University. Financial support from CNPq is gratefully acknowledged.
ISSN:0020-6598
1468-2354
DOI:10.1111/iere.12294