INCOMPLETE MARKETS, FIRMS AND THE PROJECTION HYPOTHESIS

The behaviour of corporative firms in general equilibrium models with incomplete markets is difficult to assess, because shareholders have d ifferent evaluations of profit streams in the various states of the wo rld. This paper examines the possibility of an approximation in which firms only look at traded assets and at their respective prices. The s upply correspondence resulting from such a valuation procedure is char acterized; it is also demonstrated that this is equivalent to firms us ing martingale pricing theory in the presence of incompleteness of mar kets.