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Proxy fights in incomplete markets: when majority voting and sidepayments are equivalent

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  • CRES, Herve
  • TVEDE, Mich

    (Institute of Economics, University of Copenhagen)

Abstract

This article provides a study of corporate control in a general equilibrium framework for production economies. When markets are incomplete, trading assets does not allow agents to fully resolve their conflict of interest: at the market equilibrium, shareholders disagree on the way to evaluate production plans which ly outside the market span, and the objective function of the firm is not well defined. Two ways of resolving these conflicts are compared here. The first one (see, e.g., Dreze 1974 and Grossman & Hart 1979) consists in allowing sidepayments between shareholders. The second one (see, e.g., Dreze 1985 and DeMarzo 1993) relies on majority voting in the assembly of shareholders; a stable production plan is one which cannot be overruled by a majority of shareholders. Since voting occurs in a multi-dimensional setup super majority rules are needed to ensure existence of such "political" equilibria. The most interesting equilibria are those which are stable with respect to the super majority rule with smallest rate. The present paper provides a framework where these two approaches yield the same equilibria.

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Bibliographic Info

Paper provided by HEC Paris in its series Les Cahiers de Recherche with number 726.

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Length: 16 pages
Date of creation: 01 Mar 2001
Date of revision:
Handle: RePEc:ebg:heccah:0726

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Keywords: incomplete markets; shareholders' voting; sidepayments;

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References

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  1. CRES, Herve, 2000. "Majority stable production equilibria : a multivariate mean shareholders theorem," Les Cahiers de Recherche, HEC Paris 706, HEC Paris.
  2. Caplin, Andrew S & Nalebuff, Barry J, 1988. "On 64%-Majority Rule," Econometrica, Econometric Society, Econometric Society, vol. 56(4), pages 787-814, July.
  3. Andrew Caplin & Barry Nalebuff, 1990. "Aggregation and Social Choice: A Mean Voter Theorem," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 938, Cowles Foundation for Research in Economics, Yale University.
  4. Geanakoplos, J. & Magill, M. & Quinzii, M. & Dreze, J., 1990. "Generic inefficiency of stock market equilibrium when markets are incomplete," Journal of Mathematical Economics, Elsevier, vol. 19(1-2), pages 113-151.
  5. McKelvey, Richard D, 1979. "General Conditions for Global Intransitivities in Formal Voting Models," Econometrica, Econometric Society, Econometric Society, vol. 47(5), pages 1085-1112, September.
  6. Hayne E. Leland, 1974. "Production Theory and the Stock Market," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 5(1), pages 125-144, Spring.
  7. Dierker, E. & Dierker, H. & Grodal, B., 1999. "Incomplete Markets and the Firm," Papers, Washington St. Louis - School of Business and Political Economy 9902, Washington St. Louis - School of Business and Political Economy.
  8. Schofield, Norman, 1978. "Instability of Simple Dynamic Games," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 45(3), pages 575-94, October.
  9. 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.
  10. Greenberg, Joseph, 1979. "Consistent Majority Rules over Compact Sets of Alternatives," Econometrica, Econometric Society, Econometric Society, vol. 47(3), pages 627-36, May.
  11. 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.).
  12. Ferejohn, John A. & Grether, David M., . "On a Class of Rational Social Decision Procedures," Working Papers, California Institute of Technology, Division of the Humanities and Social Sciences 25, California Institute of Technology, Division of the Humanities and Social Sciences.
  13. Steinar Ekern & Robert Wilson, 1974. "On the Theory of the Firm in an Economy with Incomplete Markets," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 5(1), pages 171-180, Spring.
  14. Kramer, Gerald H, 1973. "On a Class of Equilibrium Conditions for Majority Rule," Econometrica, Econometric Society, Econometric Society, vol. 41(2), pages 285-97, March.
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Cited by:
  1. Mich Tvede & Hervé Crés, 2005. "Voting in assemblies of shareholders and incomplete markets," Economic Theory, Springer, Springer, vol. 26(4), pages 887-906, November.

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