Corporate investment in an economy without a complete set of contingent claims markets has the characteristic of a public good in the sense that the stockholders' consumption plans cannot be separated from, but depend on, the specific investment plans of the firms. The purpose of this article is to develop an internal allocation mechanism capable of attaining production plans that are unanimously preferred by stockholders and that satisfy a natural notion of optimality applicable to the stock market economy. Section two of the article considers the allocation of corporate investment as a public good using the standard two-date model of an uncertain economy. Known results on equilibrium and optimality application to this model are also summarized. The notion of an allocation mechanism for corporate investment is formalized. The article also develops a mechanism under which stockholders respond to personalized prices by choosing their most preferred production plans. Under the assumption that stockholders behave as signal-takers and do not engage in strategic gaming, it is shown that an equilibrium relative to this mechanism exists and satisfies the applicable notion of optimality.
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Arzac, Enrique. "A Mechanism for the Allocation of Corporate Investment." Journal of Financial and Quantitative Analysis 18, no. 2 (June 1983): 175-88.