Investment Decisions and Normalization with Incomplete Markets: A Pitfall in Aggregating Shareholders' Preferences

Profit maximization is not a well defined objective when markets are incomplete. Several criteria of investment choice have therefore been put forward in the literature, some of which crucially hinge upon aggregation of shareholders' preferences, as is the case with the criteria proposed by Dreze (1974) and Grossman and Hart (1979). This note shows that these criteria are normalization dependent, i.e., their outcome depends on the good chosen to express individuals' marginal rates of substitution.