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

Abstract

We generalize a standard general equilibrium framework extended for moral hazard (Magill and Quinzii 1999, 2002) to allow for a dispersed initial ownership distribution of firms. We show that the market allocation is constrained-efficient only when in each firm the entrepreneur who generates payoffs through unobservable effort has full initial ownership in his firm.