Abstract
This paper studies production decisions by firms in a capital market where decision-making by consumer-investors and the structure of equilibrium expected returns on securities are according to a twoparameter (mean-dispersion) model. An attempt is made to distinguish clearly questions concerned with the conditions requiredfor perfect competition among firms as issuers of securities from questions concerned with whether value maximizing production decisions by perfectly competitive firms are Pareto optimal. The two major findings are as follows. First, there are natural externalities in the production decisions offirms that could in principle prevent the capital market from being perfectly competitive. But it is argued that the available empirical evidence is consistent with the conditions required for perfect competition. Second, given a market that satisfies the conditions required for perfect competition, natural external economies in the production decisions of firms can prevent the allocations
Published Version
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