Incomplete markets, firms and the projection hypothesis

Abstract

The behaviour of corporative firms in general equilibrium models with incomplete markets is difficult to assess, because shareholders have different evaluations of profit streams in the various states of the world. This paper examines the possibility of an approximation in which firms only look at traded assets and at their respective prices. The supply correspondence resulting from such a valuation procedure is characterized; it is also demonstrated that this is equivalent to firms using martingale pricing theory in the presence of incompleteness of markets.