Econometrica: Sep 1979, Volume 47, Issue 5

On Shareholder Unanimity in Large Stock Market Economies<1057:OSUILS>2.0.CO;2-C
p. 1057-1084

Oliver D. Hart

In an economy with complete markets, the owners of a firm will unanimously desire the firm to maximize profits if it is a perfect competitor. We generalize this result to an economy with incomplete markets. We show that if competitive conditions prevail--that is, if each firm is negligible relative to the aggregate economy--a firm's shareholders will want the firm to maximize the (net) market value of its shares. This result holds whether or not the so-called spanning condition is satisfied. However, while there may be agreementabout what goal the firm should pursue, there may be disagreement among shareholders about how best to pursue this goal.

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