Owning Capital or Being Shareholders: An Equivalence Result with Incomplete Markets

Eva Carceles-Poveda and Daniele Coen-Pirani

Review of Economic Dynamics, 2010, vol. 13, issue 3, 537-558

Abstract: Many recent papers in macroeconomics have studied the implications of models with household heterogeneity and incomplete financial markets under the assumption that households own the stock of physical capital and undertake the intertemporal investment decisions. In these models, production exhibits constant returns to scale, households maximize expected discounted utility, and firms rent capital and labor from households to maximize period by period profits. This paper considers the case in which infinitely lived firms, rather than households, make the intertemporal investment decisions. Under this assumption, it shows that there exists an objective function for firms that results in the same equilibrium allocation as in the standard setting with one period lived firms. The objective requires that firms maximize their asset value, which is defined as the discounted value of future cash flows using present value processes that do not allow for arbitrage opportunities. (Copyright: Elsevier)

Keywords: Incomplete markets; Firm objectives; Value maximization (search for similar items in EconPapers)
JEL-codes: D52 E44 G12 L20 (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (13)

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DOI: 10.1016/j.red.2009.08.001

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