Capital Ownership Under Incomplete Markets: Does it Matter?

In the macroeconomic literature, the implications of a context with household heterogeneity and incomplete financial markets have been mostly studied under the assumption that households own the physical capital and undertake the intertemporal investment decision. Further, firms rent capital and labor from the households to maximize period profits. The present paper provides the conditions under which this assumption is still irrelevant when markets are incomplete. It shows that, if firms own the physical capital and undertake the investment decision to maximize their asset value, in the sense that they discount future cash flows with positive state price processes that are consistent with security prices, the equilibrium allocations are the same as in the standard setting with static firms. On the other hand, the firm valuation of future cash flows only coincides with the valuation of the unconstrained shareholders. Given this, value maximization may still lead to shareholder disagreement in the presence of effectively binding portfolio restrictions.