OUTPUT CONTINGENT SECURITIES AND EFFICIENT INVESTMENT BY FIRMS

We analyze competitive economies with risky investments. Unlike the classic Arrow–Debreu framing, firms and agents cannot contract upon the exogenous states underlying production risks. They can trade equities and any security written on the endogenous aggregate output. This financial structure is rich enough to promote efficient risk sharing among consumers. However, markets are incomplete from the production perspective, and the absence of prices for each primitive state of nature raises the question about the objective of firms. We show that output‐contingent asset prices convey sufficient information to compute the competitive shareholder value that leads to efficient investment by firms.