Decentralizing Constrained Pareto Optimal Allocations in Stock Ownership Economies: An Impossibility Theorem

The authors demonstrate that if stockholders' information about unowned firms is limited to that revealed in the market, then there is no set of decision rules for firms that will decentralize constrained Pareto optimal equilibrium allocations for a robust class of economies. This result holds whether or not markets are complete. The authors show that the resulting inefficiencies are a consequence of the informational imperfection and can only be eliminated if investors have essentially full information. The structure of the authors' proof of the impossibility theorem leads them to conclude further that, in general, the economy can perform no better than when firms are value maximizers. Copyright 1987 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.