On the Shareholder-versus Stakeholder-Firm Debate

Abstract

When externalities are present, is the inclusion of the affected stakeholders in the firm's decision process a better solution than government regulation? Magill, Quinzii, and Rochet (2015) argue that it is, and propose an objective for the stakeholder corporation as well as a market mechanism to implement it. This paper shows that: (1) within the framework of Magill, Quinzii, and Rochet's (2015) model, the shareholder-oriented firm and the government can implement the same outcome even when the government does not know the firm's costs; (2) outside that framework, the proposed stakeholder objective fails to address the inefficiency. The results help garner more insight into the difficulties and limitations of embedding the stakeholder corporation into a general equilibrium model.

Keywords: Firm's objective, incomplete markets, shareholders versus stakeholders, externalities and regulation

JEL Classification: D21, D52, G20, L21