Research - Abstracts
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Abstract: This paper challenges the widespread belief that competitive markets favor entrepreneurs who operate efficient technologies. In the context of a dynamically incomplete markets model, I show that, ceteris paribus, entrepreneurs operating efficient technologies can be driven out of a competitive market by entrepreneurs operating inefficient technologies.
Keywords: Market selection hypothesis; Production under incomplete markets; Wealth accumulation; General equilibrium
JEL Classification Numbers: D21; D52; D80; D92
Abstract: In the early stages of the process of industry evolution, firms are financially constrained and might pay different wages according to workers' expectations about the prospects for advancement offered by each firm's job ladder. This paper argues that, nevertheless, if the output market is competitive, the positive predictions of the perfectly competitive model are still a good description of the long run outcome. If firms maximize the discounted sum of the value of its assets, financing expenditure out of retained earnings, profits are driven down to zero as the perfectly competitive model predicts. Ex ante identical firms may follow different growth paths because workers work for a lower entry-wage in firms they expect to grow more. In the steady state, however, workers performing the same job, in ex ante identical firms, receive the same wage. I explain when the long run outcome is efficient, when it is not, and why firms that produce inefficiently might drive the efficient ones out of the market even when the steady state has many of the positive properties of a Walrasian equilibrium. To some extent, it is not technological efficiency but workers’ self-fulfilling expectations about their prospects for advancement within the firm that explains which firms have lower unit costs, grow more, and dominate the market.
Keywords: : Industry Evolution - Market Selection Hypothesis - Production under Incomplete Markets - Retained Earnings Dynamic - Self-Fulfilling Expectations - Internal Labor Markets.
JEL Classification Numbers: D21, D52, D61, D84, D92, J41
By Pablo F. Beker and Subir K. Chattopadyay.
Journal of Economic Theory, 145 (2010), 2133 - 2185. Working Paper (with all the proofs) Abstract: We introduce a methodology for analysing infinite horizon economies with two agents, one good, and incomplete markets. We provide an example in which an agent’s equilibrium consumption is zero eventually with probability one even if she has correct beliefs and is marginally more patient. We then prove the following general result: if markets are effectively incomplete forever then on any equilibrium path on which some agent’s consumption is bounded away from zero eventually, the other agent’s consumption is zero eventually. This implies that either some agent vanishes, in that she consumes zero eventually, or the consumption of both agents is arbitrarily close to zero infinitely often. Later we show that (a) for most economies in which individual endowments are finite state time homogeneous Markov processes, the consumption of an agent who has a uniformly positive endowment cannot converge to zero and (b) the possibility that an agent vanishes is a robust outcome since for a wide class of economies with incomplete markets, there are equilibria in which an agent’s consumption is zero eventually with probability one even though she has correct beliefs as in the example. In sharp contrast to the results in the case studied by Sandroni (2000) and Blume and Easley (2006) where markets are complete, our results show that when markets are incomplete not only can the more patient agent (or the one with more accurate beliefs) be eliminated but there are situations in which the less patient agent (or the one with inaccurate beliefs) is not eliminated. Keywords: Market selection hypothesis; Incomplete markets; Wealth accumulation; General equilibrium.
J.E.L. Classification Numbers: D52, D61
Abstract: This paper analyzes the dynamic properties of portfolios that sustain dynamically complete markets equilibria when agents have heterogeneous priors. We argue that the conventional wisdom that belief heterogeneity generates continuous trade and significant fluctuations in individual portfolios may be correct but it also needs some qualifications. We consider an infinite horizon stochastic endowment economy where the actual process of the states of nature consists in i.i.d. draws. The economy is populated by many Bayesian agents with heterogeneous priors over the stochastic process of the states of nature. Our approach hinges on studying portfolios that support Pareto optimal allocations. Since these allocations are typically history dependent, we propose a methodology to provide a complete recursive characterization when agents know that the process of states of nature is i.i.d. but disagree about the probability of the states. We show that even though heterogeneous priors within that class can indeed generate genuine changes in the portfolios of any dynamically complete markets equilibrium, these changes vanish with probability one if the support of every agent's prior belief contains the true distribution. Finally, we provide examples in which asset trading does not vanish because either (i) no agent learns the true conditional probability of the states or (ii) some agent does not know the true process generating the data is i.i.d. Key words: Heterogeneous beliefs, asset trading, dynamically complete markets.
J.E.L. Classification Numbers:
Abstract: The purpose of this paper is to explain how the choice between distributing cash through dividends or shares repurchases affects the firm's ability to raise capital in the financial market. I assume investors have quadratic preferences over wealth but different prior beliefs about the likelihood a distribution takes place. At date zero agents purchase shares given their expectation about the firm's payout method. At date 1 the firm announces whether the payout takes place that period. As in Brennan and Thakor (Journal of Finance, 1990), investors with different shareholdings have different incentives to gather information and, therefore, heterogeneous preferences about payout methods at date 1. I assume the firm adopts the payout method preferred by the majority of shareholders at date 1 under the one share/one vote rule. At date 2 the firm is liquidated and the remaining output is distributed among its shareholders. If at date zero agents disagree but not too much on the probability a distribution takes place, I show that a firm expected to pay dividends raises strictly more financial capital than an otherwise identical firm which is expected to repurchase shares. Therefore, a larger fraction of cash is distributed as dividend than through repurchases. One concludes that even in the presence of a small tax disadvantage financial markets favor dividend paying firms. |
