We give a general equilibrium model of incomplete asset markets in which investors care not only about risk and returns but also environmental consequences. On the firm's objective, we consider two notions of equilibrium, a market value equilibrium and a Dreze criterion equilibrium. The market value is calculated under the representative investor's utility gradient, while the Dreze criterion is calculated under the weight average of the shareholders' utility gradients, where the weights are proportional to their shareholdings.

We interpret the latter as an equilibrium with shareholder engagement and take the difference in social welfare between the two equilibria as the consequence of shareholder engagement. We establish the existence of these equilibria. We give an equivalent condition for the two to coincide, which means that shareholder engagement makes no difference in social welfare. We show, moreover, that when it makes a difference, the difference between Dreze criterion equilibrium and market value equilibrium is positive but at most of second order, hence negligible, in a sense that can be made precise. Extensions of these results to more general cases are also discussed.

Bio: Chiaki Hara obtained a Ph.D. in Economics from Harvard University on 1993. He has since taught at University College London and the University of Cambridge, as well as holding a post-doc position at Universite Catholique de Louvain and visiting positions at Kobe University and Hitotsubashi University. He has been working on applications of microeconomic theory to the analysis of security markets, more specifically on topics such as agent heterogeneity, ambiguity aversion, and shareholder unanimity.