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Output contingent securities and efficient investment by firms

Author

Listed:
  • Luis H. B. Braido

    (EPGE - Graduate School of Economics - FGV - Fundacao Getulio Vargas [Rio de Janeiro])

  • Victor Filipe Martins da Rocha

    (EESP - Sao Paulo School of Economics - FGV - Fundacao Getulio Vargas [Rio de Janeiro], CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique)

Abstract

We analyze competitive economies with risky investments. Unlike the classic Arrow--Debreu framing, firms and agents cannot contract upon the exogenous states underlying production risks. They can trade equities and any security written on the endogenous aggregate output. This financial structure is rich enough to promote efficient risk sharing among consumers. However, markets are incomplete from the production perspective, and the absence of prices for each primitive state of nature raises the question about the objective of firms. We show that output-contingent asset prices convey sufficient information to compute the competitive shareholder value that leads to efficient investment by firms.

Suggested Citation

  • Luis H. B. Braido & Victor Filipe Martins da Rocha, 2018. "Output contingent securities and efficient investment by firms," Post-Print hal-01097363, HAL.
    • Handle: RePEc:hal:journl:hal-01097363
    DOI: 10.1111/iere.12294
    Note: View the original document on HAL open archive server: https://hal.science/hal-01097363v4
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    References listed on IDEAS

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    1. Luis H. B. Braido & V. Filipe Martins†da†Rocha, 2018. "Output Contingent Securities And Efficient Investment By Firms," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 59(2), pages 989-1012, May.

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