Majority Choice and the Objective Function of the Firm Under Uncertainty

Simon Benninga and Eitan Muller

Rodney L. White Center for Financial Research Working Papers from Wharton School Rodney L. White Center for Financial Research

Abstract: In this paper we show that even in incomplete markets a plausible firm objective function may be defined, and that this objective function coincides with the Arrow-Debreu objective function in complete markets. Our major theorem shows that a production plan may be found which will always win the approval of a majority of the firm’s initial shareholders. Furthermore, these shareholders are shown to be the only ones concerned with the firm’s production plans. Finally, it is shown that an equilibrium exists in which all firms choose plans approved by a majority of their shareholders.

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