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Stock Prices, Anticipations and Investment in General Equilibrium

Jacques Dreze, Oussama Lachiri and Enrico Minelli

Working Papers from University of Brescia, Department of Economics

Abstract: We propose an objective for the firm in a model of production economies extending over time under uncertainty and with incomplete markets. We derive the objective of the firm from the assumption of initial-shareholders efficiency. Each shareholder is assumed to commu- nicate to the firm her marginal valuation of profits at all future events (expressed in terms of initial resources). In defining her own marginal valuation of the firm's profits, a shareholder takes into consideration the direct impact of a change in the value of dividends but also the impact of future dividends on the firm's stock price when she trades shares. To predict the impact on the stock price, she uses a state price process, her price theory. The firm computes its own shadow prices for profits at all date-events by simply adding up the marginal valuations of all its initial shareholders. The only restriction that we may want to impose on price theories is that they should be compat- ible with the observed equilibrium: given the equilibrium prices and production plans, a price theory must satisfy a no-arbitrage condition. With incomplete markets and no-short selling constraints, this restric- tion need not suffice to bring consistency in the individuals marginal evaluations. As a consequence, the existence of equilibria may require constraints on the firm's investment.

Date: 2009
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