Endogenous Asset Formation: Production in General Equilibrium with Incomplete Markets

Abstract

This thesis considers production in a two period general equilibrium model with incomplete markets. Long and short run production sets are considered. Long run production sets imply that, capital, raised by each firm through issuing stocks, is endogenized. We show that for any feasible combination of capital, equilibrium always exists. A main property of the model considered is that the efficient boundary of the production set available to each firm is not independent of its financial activities. This links the real with the financial sector of the economy. Equilibrium properties beyond existence of equilibrium include the separation of the activities of the agents, the efficient organization of production, and the determinateness of real equilibria.