Incentives and Risk Sharing in a Stock Market Equilibrium

UC Davis Working Paper #96-12

Posted: 22 Jan 1997

See all articles by Michael J. P. Magill

Michael J. P. Magill

University of Southern California - Department of Economics

Martine Quinzii

University of California, Davis - Department of Economics

Date Written: December 1996

Abstract

Economists hold two opposing views of the stock market: one focuses on the negative effect on incentives of separating ownership and control, the other emphasizes its beneficial role for risk sharing. Using a generalization of Diamond's model which incorporates the effect of entrepreneurial incentives, we show how these two views can be reconciled. We introduce the concept of a stock market equilibrium with rational competitive price perceptions (RCPP) and show that such and equilibrium leads to a constrained optimal trade-off between risk sharing and incentives. We give examples showing the difference between RCPP equilibria and the standard CAPM type equilibria of finance.

JEL Classification: D52, G32.

Suggested Citation

Magill, Michael J. P. and Quinzii, Martine, Incentives and Risk Sharing in a Stock Market Equilibrium (December 1996). UC Davis Working Paper #96-12. Available at SSRN: https://ssrn.com/abstract=8054

Michael J. P. Magill (Contact Author)

University of Southern California - Department of Economics ( email )

3620 South Vermont Ave. Kaprielian (KAP) Hall, 300
Los Angeles, CA 90089
United States
213-740-2104 (Phone)
213-740-8543 (Fax)

Martine Quinzii

University of California, Davis - Department of Economics ( email )

One Shields Drive
Davis, CA 95616-8578
United States
530-752-1567 (Phone)
530-752-9382 (Fax)

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