Capital Gains and the Economic Theory of Corporate Finance

Abstract

The dependence of one agent’s actions upon those of another constitutes a fundamental departure point for much of received economic theory. Apart from a deterministic setting, the presence of uncertainty implies a dependence on the probable actions of other agents; that is, the ultimate behavior of an individual is to a certain extent a consequence of his beliefs concerning the behavior of other agents. While the difficulty associated with formulating even crude conjectures of this nature is overwhelming, actual informational demands are even greater as from the dependence of agent A’s actions on his beliefs concerning agent B’s actions, it follows directly that agent B’s actions are dependent on his beliefs concerning agent A’s beliefs relative to his (agent B’s) action as well, as infinitum.