Investment Decisions and Normalization with Incomplete Markets: A Pitfall in Aggregating Shareholders’ Preferences

Abstract

Profit maximization is not a well defined objective when markets are incomplete. Several_x000D_ criteria of investment choice have therefore been put forward in the literature, some of which_x000D_ crucially hinge upon aggregation of shareholders’ preferences, as is the case with the criteria_x000D_ proposed by Drèze (1974) and Grossman and Hart (1979). This note shows that these criteria_x000D_ are normalization dependent, i.e., their outcome depends on the good chosen to express individuals’_x000D_ marginal rates of substitution.