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A Consistent Firm Objective When Markets are Incomplete: Profit Maximization

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  • Tarun Sabarwal

Abstract

In economies with private firm ownership, when markets are incomplete, and firm shareholders change over time, there is no broad agreement on what ought to be a firm's objective. It is shown that ex-post, profit maximization is consistent with shareholder preferences in such economies; that is, along the equilibrium path, in every period and state of the world, every coalition of a firm's shareholders in that period and state approves a profit-maximizing production plan. This result is shown using natural assumptions about shareholder preferences and shareholder control, and it applies to cases when shareholders within a firm and across firms can form coalitions, and when stock trading can be ex-dividend or cum-dividend, and with a combination of both. This result can help provide a foundation for formulating a theory of the firm when markets are incomplete; a theory based on primitives of shareholder preferences and shareholder control that are to be necessarily satisfied in economies with private firm ownership.

Suggested Citation

  • Tarun Sabarwal, 2004. "A Consistent Firm Objective When Markets are Incomplete: Profit Maximization," Econometric Society 2004 North American Summer Meetings 141, Econometric Society.
    • Handle: RePEc:ecm:nasm04:141
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    References listed on IDEAS

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    More about this item

    Keywords

    Incomplete Markets; Firm Objective; Profit Maximization; Shareholder Preferences;
    All these keywords.

    JEL classification:

    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets

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