Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/31381 
Year of Publication: 
2007
Series/Report no.: 
Working Paper No. 08-3
Publisher: 
University of California, Department of Economics, Davis, CA
Abstract: 
We develop an alternative approach to the general equilibrium analysis of a stochastic production economy when firm's choices of investment influence the probability distributions of their output. Using a normative approach we derive the criterion that a firm should maximize to obtain a Pareto optimal equilibrium: the criterion expresses the firm's contribution to the expected social utility of output, and is not the linear criterion of market value. If firms do not know agents utility functions, and are restricted to using the information conveyed by prices then they can construct an approximate criterion which leads to a second-best choice of investment which, in examples, is found to be close to the first best.
Document Type: 
Working Paper

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