The role of initial shares in multi-period production economies with incomplete markets

This paper focuses on a single firm with constant returns to scale in a multi-period setting with incomplete markets and a single good per state. Profits vanish whenever the firm maximizes profits with respect to a given price system. The paper addresses the following question: Shall the firm always act as a price taker? In the case of a partnership, there are no initial shares and no profits accrue from production. A corporation, however, has initial shareholders and can sell its output at any price. An example shows that this additional freedom can improve efficiency and welfare. This results from the fact that a wedge between price and cost can mitigate the inefficiency caused by the consumers who disregard the impact of their initial portfolio decisions on subsequent markets.