The Stock Market, the Objective Function of the Firm, and Intertemporal Pareto Efficiency -- The Certainty Case

An extensive literature has recently dealt with problems concerning the stock market and the objective function of the firm, under conditions of uncertainty. This paper deals with the certainty case and develops a two-date production economy with a stock market, distinguished from the corresponding Arrow-Debreu model by a different market structure. Even in this simple set-up, different objective functions of the firm can be examined. Maximizing the market value of shares does not lead to Pareto efficiency, unless there are very many firms. By contrast, maximizing the rate of return on stockholders' investments, when taking the value of shares as given, does lead to Pareto efficiency.