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Stiglitz, Joseph E.; Grossman, Sanford J.http://hdl.handle.net/10022/AC:P:20173Thu, 02 May 2013 00:00:00 +0000Although the price system is conventionally praised as an efficient way of transmitting the information required to arrive at a Pareto optimal allocation of resources, the context in which the price system is usually discussed is not one in which the informational efficiency of the price system can be properly evaluated. Questions of how the price system leads the economy to respond to a new situation, how it conveys information from informed individuals to uninformed individuals, and how it aggregates the different information of different individuals, are never directly attacked. In a series of papers authors have attempted to remedy this deficiency. It is the object of this article to draw attention to some of the more fundamental implications of authors approach and to use it to assess the meaning and validity of the efficient market hypothesis. Although the discussion of authors will accordingly focus on the capital market, the kind of analysis developed here is applicable to any competitive market subject to random shocks.Economicsjes322EconomicsArticlesOn Value Maximization and Alternative Objectives of the Firm
http://academiccommons.columbia.edu/catalog/ac:160449
Stiglitz, Joseph E.; Grossman, Sanford J.http://hdl.handle.net/10022/AC:P:20142Wed, 01 May 2013 00:00:00 +0000The recent literature on firm behavior has been characterized by two contrasting strands of analysis: on the one hand, there is the literature attempting to extend the conventional maxims of profit maximization of competitive firms from the familiar static models to dynamic contexts and into situations of uncertainty. These analyses argue that firms should maximize their stock market value and explore the implications of this for firm behavior. On the other hand, there is the vast and growing "managerial" literature, in which other objectives, such as "satisficing," "sales maximizing," and "maximization of the manager's utility functions" are postulated. The second group of analyses criticize the first as being unrealistic, while the first argues that it provides the best "first approximation" to firm behavior: if firms did not maximize their stock market value, or deviated far from value maximization, someone would attempt to take them over, change the course of action of the firm, and make a pure capital gain. This paper presents a unified framework for analyzing firm behavior which can be used to reconcile these divergent views.Economicsjes322EconomicsArticlesStockholder Unanimity in Making Production and Financial Decisions
http://academiccommons.columbia.edu/catalog/ac:160370
Stiglitz, Joseph E.; Grossman, Sanford J.http://hdl.handle.net/10022/AC:P:20123Wed, 01 May 2013 00:00:00 +0000We show that "spanning" does not imply stockholder unanimity if there is trading in the shares of firms. Each basis vector of the space spanned by all firms' output vectors can be treated like a composite commodity. If, in addition to spanning, firms act as price takers with respect to prices of composite commodities, then there is unanimity. We analyze the spanning assumption for the vector space of contingent claims generated by firms' choices of debt-equity ratios. We show that there is a strong relationship between the Modigliani-Miller theorem, spanning, and the existence of a complete set of markets.Economicsjes322EconomicsArticlesOn the Impossibility of Informationally Efficient Markets
http://academiccommons.columbia.edu/catalog/ac:160355
Stiglitz, Joseph E.; Grossman, Sanford J.http://hdl.handle.net/10022/AC:P:20121Wed, 01 May 2013 00:00:00 +0000If competitive equilibrium is defined as a situation in which prices are such that all arbitrage profits are eliminated, it is not clear whether it is possible that a competitive economy will always be in equilibrium. Clearly not, for then those who arbitrage make no return from their costly activity. Hence the assumptions that all markets, including that for information, are always in equilibrium and always perfectly arbitraged are inconsistent when arbitrage is costly. A model has been proposed in which there is an equilibrium degree of disequilibrium: prices reflect the information of informed individuals but only partially, so that those who expend resources to obtain information do receive compensation. The model is the simplest one in which prices perform a well-articulated role in conveying information from the informed to the uninformed. When informed individuals observe information that the return to a security is going to be high, they bid its price up, and conversely when they observe information that the return is going to be low. Thus the price system makes publicly available the information obtained by informed individuals to the uniformed. The theory of "efficient capital markets" has also been discussed.Economicsjes322EconomicsArticlesOn the Impossibility of Informationally Efficient Markets: Reply
http://academiccommons.columbia.edu/catalog/ac:160301
Stiglitz, Joseph E.; Grossman, Sanford J.http://hdl.handle.net/10022/AC:P:20104Wed, 01 May 2013 00:00:00 +0000The article presents a reply to the comments of economist Richard Cothren on a paper related to efficient market theory written by the authors. According to the author Cothren's assertion that the authors incorrectly derived an informed trader's risky asset demand function is false. They permitted borrowing and short selling. For this reason there is no nonnegativity constraint on a trader's holdings of risky or risk-free assets. A trader's initial wealth is not the limit on the value of the risky assets that he can purchase. The trader can borrow, and in so doing finance a large purchase of risky assets. The goal of their paper was to show that when information is costly, a perfectly competitive equilibrium will not exist which completely transmits the informed traders' information to uninformed traders. It would have been trivial to prove that constraints on borrowing, or on short sales, prevent perfect arbitrage from occurring. They proved a more interesting result, which is that even in the absence of constraints on borrowing or short sales, markets cannot be fully arbitraged, when information about the arbitrage opportunity is costly.Economicsjes322EconomicsArticlesStockholder Unanimity in Making Production and Financial Decisions
http://academiccommons.columbia.edu/catalog/ac:148870
Grossman, Sanford J.; Stiglitz, Joseph E.http://hdl.handle.net/10022/AC:P:13785Mon, 02 Jul 2012 00:00:00 +0000We show that "spanning" does not imply stockholder unanimity if there is trading in the shares of firms. Each basis vector of the space spanned by all firms' output vectors can be treated like a composite commodity. If, in addition to spanning, firms act as price takers with respect to prices of composite commodities, then there is unanimity. We analyze the spanning assumption for the vector space of contingent claims generated by firms' choices of debt-equity ratios. We show that there is a strong relationship between the Modigliani-Miller theorem, spanning, and the existence of a complete set of markets.Economicsjes322Business, Economics, International and Public AffairsArticles