A Consistent Firm Objective When Markets are Incomplete: Profit Maximization
Issue Date
2004-08-11Author
Sabarwal, Tarun
Publisher
Econometric Society
Type
Working Paper
Is part of series
Econometric Society 2004 North American Summer Meetings;141
Published Version
http://EconPapers.repec.org/RePEc:ecm:nasm04:141Metadata
Show full item recordAbstract
In economies with private firm ownership, when markets are incomplete, and firm shareholders change over time, there is no broad agreement on what ought to be a firm's objective. It is shown that ex-post, profit maximization is consistent with shareholder preferences in such economies; that is, along the equilibrium path, in every period and state of the world, every coalition of a firm's shareholders in that period and state approves a profit-maximizing production plan. This result is shown using natural assumptions about shareholder preferences and shareholder control, and it applies to cases when shareholders within a firm and across firms can form coalitions, and when stock trading can be ex-dividend or cum-dividend, and with a combination of both. This result can help provide a foundation for formulating a theory of the firm when markets are incomplete; a theory based on primitives of shareholder preferences and shareholder control that are to be necessarily satisfied in economies with private firm ownership.
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Citation
Sabarwal, Tarun. (2004) A Consistent Firm Objective When Markets are Incomplete: Profit Maximization, Econometric Society 2004 North American Summer Meetings, Econometric Society.
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