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Endogenous Firm Objectives

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  • Erkan Yalçin
  • Thomas I. Renström

Abstract

We analyze the behavior of a monopolistic firm in general equilibrium when the firm's decisions are taken through shareholder voting. We show that, depending on the underlying distribution, rational voting may imply overproduction as well as underproduction, relative to the efficient level. Any initial distribution of shares is an equilibrium, if individuals do not recognize their influence on voting when trading shares. However, when they do, and there are no short–selling constraints, the only equilibrium is the efficient one. With short–selling constraints typically underproduction occurs. It is not market power itself causing underproduction, but the inability to perfectly trade the rights to market power.

Suggested Citation

  • Erkan Yalçin & Thomas I. Renström, 2003. "Endogenous Firm Objectives," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 5(1), pages 67-94, January.
    • Handle: RePEc:bla:jpbect:v:5:y:2003:i:1:p:67-94
    DOI: 10.1111/1467-9779.00122
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    References listed on IDEAS

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    3. Birgit Grodal, 1996. "Profit Maximization and Imperfect Competition," International Economic Association Series, in: Beth Allen (ed.), Economics in a Changing World, chapter 1, pages 3-22, Palgrave Macmillan.
    4. Sadanand, Asha B & Williamson, John M, 1991. "Equilibrium in a Stock Market Economy with Shareholder Voting," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(1), pages 1-35, February.
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    Citations

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    Cited by:

    1. David Kelsey & Frank Milne, 2008. "Imperfect Competition and Corporate Governance," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 10(6), pages 1115-1141, December.
    2. David Kelsey & Frank Milne, 2006. "Externalities, monopoly and the objective function of the firm," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 29(3), pages 565-589, November.
    3. Stefano Demichelis & Klaus Ritzberger, 2007. "Corporate Control and the Stock Market," Carlo Alberto Notebooks 60, Collegio Carlo Alberto.
    4. David Kelsey & Frank Milne, 2010. "Takeovers and cooperatives: governance and stability in non-corporate firms," Journal of Economics, Springer, vol. 99(3), pages 193-209, April.
    5. Dirk Willenbockel, 2005. "The Price Normalisation Problem in General Equilibriun Models with Oligopoly Power: An Attempt at Perspective," GE, Growth, Math methods 0505002, University Library of Munich, Germany.
    6. David Kelsey & Frank Milne, 2006. "Takeovers And Cooperatives," Working Paper 1113, Economics Department, Queen's University.
    7. Petra Geraats & Hans Haller, 1998. "Shareholders' choice," Journal of Economics, Springer, vol. 68(2), pages 111-135, June.

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