A Consistent Firm Objective When Markets are Incomplete: Profit Maximization

Tarun Sabarwal

No 141, Econometric Society 2004 North American Summer Meetings from Econometric Society

Abstract: 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.

Keywords: Incomplete Markets; Firm Objective; Profit Maximization; Shareholder Preferences (search for similar items in EconPapers)
JEL-codes: D51 D52 (search for similar items in EconPapers)
Date: 2004-08-11
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