DP3361 Endogenous Firm Objectives

Author(s): Thomas I Renström, Erkan Yalcin
Publication Date: May 2002
Keyword(s): imperfect competition, shareholder voting
JEL(s): D21, G34, L21
Programme Areas: Financial Economics, Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=3361

We analyse the behaviour of a monopolistic firm in general equilibrium when the firm’s decision are taken through shareholder voting. We show that, depending on the underlying distribution, rational voting may imply overproduction as well as underproduction, relative to the efficient level. Any initial distribution of shares is an equilibrium, if individuals do not recognize their influence on voting when trading shares. When they do, however, and there are no short-selling constraints the only equilibrium is the efficient one. With short-selling constraints typically underproduction occurs. It is not market power itself causing underproduction, but the inability to perfectly trade the rights to market power.