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Wealth Effects

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  • Patrick Legros
  • Andrew F. Newman

Abstract

We construct a general equilibrium model of firm formation in which organization is endogenous. Incentive-based wealth effects arises from lower bounds on wealth and utility, and these affect the way in which different organizational forms can divide the proceeds of production. Individuals may choose between organizaing their firms as hierarchies or as partnerships; these decisions are mediated by agency costs in both labor and financial markets. The type of organization which emerges depends on the distribution of wealth and need not be surplus maximizing: the same output could be produced with less labor if some firms were forced to reorganize from their equilibrium form. This result suggests that instead of serving to provide incentives efficiently, organizations may sometimes act to transfer surplus from some agents to others, at potential social cost.

Suggested Citation

  • Patrick Legros & Andrew F. Newman, 1992. "Wealth Effects," Discussion Papers 1024, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    • Handle: RePEc:nwu:cmsems:1024
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    Cited by:

    1. John P. Conley & Myrna Holtz Wooders, 1998. "The Tiebout Hypothesis: On the Existence of Pareto Efficient Competitive Equilibrium," Working Papers mwooders-98-06, University of Toronto, Department of Economics.
    2. Piketty, Thomas, 2000. "Theories of persistent inequality and intergenerational mobility," Handbook of Income Distribution, in: A.B. Atkinson & F. Bourguignon (ed.), Handbook of Income Distribution, edition 1, volume 1, chapter 8, pages 429-476, Elsevier.
    3. Robinson, James A. & Nugent, Jeffrey B, 2002. "Are Endowments Fate?," CEPR Discussion Papers 3206, C.E.P.R. Discussion Papers.
    4. Rocco Macchiavello, 2007. "Vertical Integration, Missing Middle and Investor Protection in Developing Countries," Economics Series Working Papers 373, University of Oxford, Department of Economics.
    5. Maitreesh Ghatak & Massimo Morelli & Tomas Sjoström, 2001. "Credit rationing, wealth inequality, and allocation of talent," ICER Working Papers - Applied Mathematics Series 23-2001, ICER - International Centre for Economic Research.
    6. Edward Simpson Prescott & Robert M. Townsend, 2006. "Firms as Clubs in Walrasian Markets with Private Information," Journal of Political Economy, University of Chicago Press, vol. 114(4), pages 644-671, August.
    7. Mark S. Carey & Stephen D. Prowse & John Rea & Gregory F. Udell, 1993. "The economics of the private placement market," Staff Studies 166, Board of Governors of the Federal Reserve System (U.S.).
    8. Abhijit Banarjee, 2000. "The Two Poverties," Nordic Journal of Political Economy, Nordic Journal of Political Economy, vol. 26, pages 129-141.

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