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Production externalities: internalization by voting

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  • Hervé Crès

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  • Mich Tvede

    ()

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    Abstract

    We study internalization of production externalities in perfectly competitive markets where production plans are decided by majority voting. Since shareholders want firms to maximize dividends of portfolios rather than profits, they are interested in some internalization. Two governances, namely the shareholder governance (one share, one vote) and the stakeholder democracy (one stakeholder, one vote), are compared. We argue that perfect internalization is more likely to be the outcome of the stakeholder democracy than the shareholder governance. Copyright Springer-Verlag 2013

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    Bibliographic Info

    Article provided by Springer in its journal Economic Theory.

    Volume (Year): 53 (2013)
    Issue (Month): 2 (June)
    Pages: 403-424

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    Handle: RePEc:spr:joecth:v:53:y:2013:i:2:p:403-424

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    Related research

    Keywords: General equilibrium; Majority voting; Production externalities; Shareholder governance versus stakeholder democracy; Social choice; D21; D51; D72; G39; L21;

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    References

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    1. DeMarzo, Peter M, 1993. "Majority Voting and Corporate Control: The Rule of the Dominant Shareholder," Review of Economic Studies, Wiley Blackwell, vol. 60(3), pages 713-34, July.
    2. Grandmont, Jean-Michel, 1978. "Intermediate Preferences and the Majority Rule," Econometrica, Econometric Society, vol. 46(2), pages 317-30, March.
    3. Ritzberger, Klaus, 2005. "Shareholder voting," Economics Letters, Elsevier, vol. 86(1), pages 69-72, January.
    4. Caplin, Andrew & Nalebuff, Barry, 1991. "Aggregation and Social Choice: A Mean Voter Theorem," Econometrica, Econometric Society, vol. 59(1), pages 1-23, January.
    5. Mich Tvede & Hervé Crès, 2004. "Voting in Assemblies of Shareholders and Incomplete Markets," Discussion Papers 04-09, University of Copenhagen. Department of Economics.
    6. Kelsey, David & Milne, Frank, 1996. "The existence of equilibrium in incomplete markets and the objective function of the firm," Journal of Mathematical Economics, Elsevier, vol. 25(2), pages 229-245.
    7. Camelia Bejan, 2008. "The objective of a privately owned firm under imperfect competition," Economic Theory, Springer, vol. 37(1), pages 99-118, October.
    8. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-37, October.
    9. Sanford Grossman & Oliver Hart, 1978. "A theory of competitive equilibrium in stock market economies," Special Studies Papers 115, Board of Governors of the Federal Reserve System (U.S.).
    10. Hansen, Robert G. & Lott, John R., 1996. "Externalities and Corporate Objectives in a World with Diversified Shareholder/Consumers," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(01), pages 43-68, March.
    11. Greenberg, Joseph, 1979. "Consistent Majority Rules over Compact Sets of Alternatives," Econometrica, Econometric Society, vol. 47(3), pages 627-36, May.
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