ASPECTS OF AN ECONOMY UNDER UNCERTAINTY
Abstract
How best to organize the production of goods and services in an uncertain environment has been studied from many points of view. In this work we study a competitive economy consisting of stockholders/investors who provide capital to the different firms, and managers who combine the input capital with their managerial skill. Given the technology of a firm, the actions of the two groups, and the state of nature which occurs, an output is produced and returns are determined for all agents. In the first chapter we neglect the management aspect of firms and we focus on a question regarding large projects: should a given large project be undertaken? We also consider the relative merits of public versus private ownership of the project. We given sufficient criteria for rejection and acceptance of large projects in terms of market data, in certain circumstances. Here public and private investments have equal merits. In the second part, we focus on how the division of output between the managerial group and the investor group affects the overall performance of the firms and the welfare of the economy. We demonstrate that a certain class of simple manager's incentive functions contains the Pareto optimal ones. This class of incentive functions would be interpreted as a particular type of capital structure where the manager is the only stockholder of the firm and the shareholders' return is a risky bond. Deviations from this class of functions, that is, from this type of capital structure, result in costs which have been called "agency costs". In the third part we extend the stock market economy to include both public and private firms. We analyze and contrast management incentives and investment decisions in the public and private sectors. We find that publicly owned firms should choose from the same class of incentive functions as the private sector firms. If there are inadequate managerial incentives in a public firm, then the socially optimal level of investment is lower than for a firm with incentives: such public firms are inefficient users of capital. In cases where a natural monopoly exists we need to add the role of the regulator. In some senses a regulated firm is intermediate between a publicly owned and privately owned firm. Our model can be extended to explore the interdependency of the regulator, investors, and managers, and to study the resulting performances of the monopoly and the welfare of the economy.
Degree
Ph.D.
Subject Area
Economic theory
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