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Production in incomplete markets: Expectations matter for political stability

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  • Crès, Hervé
  • Tvede, Mich

Abstract

In the present paper we study voting-based corporate control in a general equilibrium model with incomplete financial markets. Since voting takes place in a multi-dimensional setting, super-majority rules are needed to ensure existence of equilibrium. In a linear-quadratic setup we show that the endogenization of voting weights (given by portfolio holdings) can give rise to - through self-fulfilling expectations - dramatical political instability, i.e. Condorcet cycles of length two even for very high majority rules.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Mathematical Economics.

Volume (Year): 45 (2009)
Issue (Month): 3-4 (March)
Pages: 212-222

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Handle: RePEc:eee:mateco:v:45:y:2009:i:3-4:p:212-222

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Web page: http://www.elsevier.com/locate/jmateco

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Keywords: Incomplete markets Super majority voting Political (in)stability Self-fulfilling expectations;

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References

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  1. Caplin, A. & Nalebuff, B., 1989. "Aggregation And Social Choice: A Mean Voter Theorem," Discussion Papers, Columbia University, Department of Economics 1989_31, Columbia University, Department of Economics.
  2. Mich Tvede & Hervé Crès, 2004. "Voting in Assemblies of Shareholders and Incomplete Markets," Discussion Papers, University of Copenhagen. Department of Economics 04-09, University of Copenhagen. Department of Economics.
  3. Kelsey, David & Milne, Frank, 1996. "The existence of equilibrium in incomplete markets and the objective function of the firm," Journal of Mathematical Economics, Elsevier, Elsevier, vol. 25(2), pages 229-245.
  4. Sanford Grossman & Oliver Hart, 1978. "A theory of competitive equilibrium in stock market economies," Special Studies Papers, Board of Governors of the Federal Reserve System (U.S.) 115, Board of Governors of the Federal Reserve System (U.S.).
  5. Simon Benninga & Eitan Muller, 1979. "Majority Choice and the Objective Function of the Firm under Uncertainty," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 10(2), pages 670-682, Autumn.
  6. DeMarzo, Peter M, 1993. "Majority Voting and Corporate Control: The Rule of the Dominant Shareholder," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 60(3), pages 713-34, July.
  7. Sadanand, Asha B & Williamson, John M, 1991. "Equilibrium in a Stock Market Economy with Shareholder Voting," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(1), pages 1-35, February.
  8. Grandmont, Jean-Michel, 1978. "Intermediate Preferences and the Majority Rule," Econometrica, Econometric Society, Econometric Society, vol. 46(2), pages 317-30, March.
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Cited by:
  1. Utku Unver & Hervé Crès, 2005. "Ideology and existence of 50% : Majority equilibria in multidimensional spatial voting models," Sciences Po publications, Sciences Po 818/2005, Sciences Po.

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