The role of initial shares in multi-period production economies with incomplete markets

Egbert Dierker

No 327, Economics Series from Institute for Advanced Studies

Abstract: This paper focuses on a single firm with constant returns to scale in a multi-period setting with incomplete markets and a single good per state. Profits vanish whenever the firm maximizes profits with respect to a given price system. The paper addresses the following question: Shall the firm always act as a price taker? In the case of a partnership, there are no initial shares and no profits accrue from production. A corporation, however, has initial shareholders and can sell its output at any price. An example shows that this additional freedom can improve efficiency and welfare. This results from the fact that a wedge between price and cost can mitigate the inefficiency caused by the consumers who disregard the impact of their initial portfolio decisions on subsequent markets.

Keywords: Multi-period economies with incomplete markets; partnerships and corporations; competitive price perceptions; the role of initial shares; the objective of a firm; efficiency and social welfare (search for similar items in EconPapers)
JEL-codes: D21 D52 D61 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2017-01
New Economics Papers: this item is included in nep-mkt
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https://irihs.ihs.ac.at/id/eprint/4211 First version, 2017 (application/pdf)

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