Income and Efficiency in Incomplete Markets

Anil Arya (), John Fellingham, Jonathan Glover, Doug Schroeder and Richard Young

Corporate Finance & Organizations from Ohio State University

Abstract: In this paper we examine a simple but suggestive setting in which the income number arises naturally (and directly) from competitive markets. While no explicit assumptions are made about individual firm's objectives, it turns out that equilibrium is consistent with the maximization of a number which is equal to the difference between the value of commodities sold and the value of resources purchased. This number, which we call income, is instructive about the central economic questions of equilibrium and productive efficiency in the following way. If any firm's income is not maximized the economy is not in equilibrium. Given equilibrium prices, if each firm's income is maximized production is efficient.

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