Incentives and Risk Sharing in a Stock Market Equilibrium

Martine Quinzii and Michael Magill
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Michael Magill: Department of Economics, University of California Davis

No 3, Working Papers from University of California, Davis, Department of Economics

Abstract: Economists hold two opposing views of the stock market: one focuses on the negative effect on incentives of separating ownership and control, the other emphasizes its beneficial role for risk sharing. Using a generalization of Diamond''s model which incorporates the effect of entrepreneurial incentives, we show how these two views can be reconciled. We introduce the concept of a stock market equilibrium with rational competitive price perceptions (RCPP) and show that such and equilibrium leads to a constrained optimal trade-off between risk sharing and incentives. We give examples showing the difference between RCPP equilibria and the standard CAPM type equilibria of finance.

Pages: 40
Date: 2003-01-07
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https://repec.dss.ucdavis.edu/files/Jq4tJH8Jfqi56GEvW39EvpCt/96-12.pdf (application/pdf)

Related works:
Working Paper: INCENTIVES AND RISK SHARING IN A STOCK MARKET EQUILIBRIUM
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