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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/14767
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| Title: | Profit Maximization and the Market Selection Hypothesis |
| Authors: | Dutta, Prajit K.
Radner, Roy |
| Issue Date: | Dec-1998 |
| Publisher: | Stern School of Business, New York University |
| Series/Report no.: | IS-96-005 |
| Abstract: | We examine the proposition chat competitive firms must behave as if they
were maximizing profits; otherwise they would go bankrupt, or even fail
to be financed in a competitive capital market. We investigate a model
in which an entrepreneur raises funds for a risky enterprise on a
competitive capital market, by offering a "dividend policy"
based on the realized (stochastic) flow of earnings. We show that an
entrepreneur who maximizes the expected sum of discounted dividends is
sure to fal1 in finite time. On the other hand, many other behaviours
yield positive expected profits and are able to attract investment
funds, and yet result in a positive probability of surviving forever. As
a consequence, if new firms have sufficiently diverse behaviours, then
even if there is a constant stream of new entrants, after a long time
practically all of the surviving firms will not have been maximizing profit. |
| URI: | http://hdl.handle.net/2451/14767 |
| Appears in Collections: | IOMS: Information Systems Working Papers
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