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Initial shares can cause Pareto improvements when markets are incomplete

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  • Egbert Dierker

    (Institute for Advanced Studies
    Vienna Graduate School of Economics)

Abstract

The 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. The firm can be organized as a partnership or as a corporation. In the case of a partnership, there are no initial shares and profits vanish. A corporation has initial shareholders and can sell its output at any market-clearing price. An example shows that the introduction of initial shares can cause a Pareto improvement. The firm sells its output below costs so that the net sellers of initial shares subsidize the net buyers. The initial shares are chosen such that, for each consumer, the benefits of the output expansion more than outweigh the cost increase.

Suggested Citation

  • Egbert Dierker, 2018. "Initial shares can cause Pareto improvements when markets are incomplete," Economic Theory Bulletin, Springer;Society for the Advancement of Economic Theory (SAET), vol. 6(2), pages 171-181, October.
    • Handle: RePEc:spr:etbull:v:6:y:2018:i:2:d:10.1007_s40505-018-0135-x
    DOI: 10.1007/s40505-018-0135-x
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    References listed on IDEAS

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    1. Jaskold Gabszewicz, Jean & Vial, Jean-Philippe, 1972. "Oligopoly "A la cournot" in a general equilibrium analysis," Journal of Economic Theory, Elsevier, vol. 4(3), pages 381-400, June.
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    3. Dierker, Egbert & Dierker, Hildegard, 2010. "Welfare and efficiency in incomplete market economies with a single firm," Journal of Mathematical Economics, Elsevier, vol. 46(5), pages 652-665, September.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Multi-period economies with incomplete markets; Partnerships and corporations; Marginal cost pricing; The role of initial shares; The objective of a firm; Efficiency and social welfare;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis

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