Abstract: In an incomplete asset market, firms assign values to investment plans by projecting their payoffs on the span of the payoffs of marketed assets; equivalently, firms employ the Capital Asset Pricing Model. This is a criterion that does not require firms to possess information, such as the marginal valuation of revenue across date -- events by shareholders, which is not observable; rather, it is based on information revealed by the prices and payoffs of marketed assets. Under standard assumptions, competitive equilibria exist. But, competitive equilibrium allocations need not satisfy a condition of constrained Pareto optimality that recognizes the incompleteness of the asset market; and, even in the absence of nominal assets, competitive equilibrium allocations are generically indeterminate -- they are determinate if firm consider the commodity payoffs of shares.
Publication Year: 1997
Publication Date: 1997-02-01
Language: en
Type: preprint
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