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Nonexistence of constrained efficient production plans

Michael Zierhut

Journal of Mathematical Economics, 2019, vol. 83, issue C, 127-136

Abstract: Any normative theory is based on a standard of social welfare. When markets are incomplete, the usual standard is constrained efficiency: A planner who may only use traded assets for transfers of future income cannot achieve a Pareto improvement. This paper points out that constrained efficiency is a weak basis for the normative theory of the firm. Unless short sales are restricted, a constrained Pareto optimum need not exist. This nonexistence problem is robust to perturbations of endowments and leads to surprising economic outcomes: Even though Drèze equilibria are the only candidates for constrained efficient plans, all of them can be Pareto dominated by equilibria with alternative objectives of the firm.

Keywords: Incomplete markets with production; Constrained efficiency; Firm objectives; Drèze equilibria (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:mateco:v:83:y:2019:i:c:p:127-136

DOI: 10.1016/j.jmateco.2019.04.011

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