Dispersed Initial Ownership and the Efficiency of the Stock Market Under Moral Hazard

Posted: 10 Nov 2009

See all articles by Riccardo Calcagno

Riccardo Calcagno

EMLYON Business School

Wolf Wagner

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM); Centre for Economic Policy Research (CEPR)

Date Written: 2006

Abstract

The degree to which stock markets can perform theirrole of allocating resources efficiently in the presence of moral hazard isinvestigated. First, an existing framework is extended in order to define stockmarket equilibrium in such a way that allows for a dispersed initial ownershipdistribution in firms. The next section shows that the constrained efficiency of the stock marketbreaks down when entrepreneurs do not have full ownership in their firms beforemarket trading. Although previous research has suggested that this inefficiencycan be resolved through market completion, the argument of this study is that acontract in which an entrepreneur commits to trade his or herfirm onlywith the initial owners can restore the efficiency of the stock market.(SAA)

Keywords: Contracts & agreements, Stock markets, Equilibrium, Firm ownership, Moral hazard problem, Market resources, Resource management, Assets

Suggested Citation

Calcagno, Riccardo and Wagner, Wolf, Dispersed Initial Ownership and the Efficiency of the Stock Market Under Moral Hazard (2006). Journal of Mathematical Economics, Vol. 42, Issue 1, p. 36-45 2006. Available at SSRN: https://ssrn.com/abstract=1503272

Riccardo Calcagno (Contact Author)

EMLYON Business School ( email )

23 Avenue Guy de Collongue
Ecully, 69132
France
+33(0)4 78337739 (Phone)

HOME PAGE: http://sites.google.com/site/rcalcagnopersonalwebpage/

Wolf Wagner

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM) ( email )

P.O. Box 1738
Room T08-21
3000 DR Rotterdam, 3000 DR
Netherlands

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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