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Production in incomplete markets: Expectations matter for political stability

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  • Mich Tvede

    (Institute of Economics)

  • Hervé Crès

    (Département d'économie)

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    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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    File URL: http://spire.sciences-po.fr/hdl:/2441/10267/resources/109cres-tvede.pdf
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    Bibliographic Info

    Paper provided by Sciences Po in its series Sciences Po publications with number info:hdl:2441/10267.

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    Date of creation: Mar 2009
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    Publication status: Published in Journal of Mathematical Economics (2009) v.45 , p.212-222
    Handle: RePEc:spo:wpmain:info:hdl:2441/10267

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    1. Mich Tvede & Hervé Crès, 2004. "Voting in Assemblies of Shareholders and Incomplete Markets," Discussion Papers 04-09, University of Copenhagen. Department of Economics.
    2. 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.).
    3. 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, vol. 32(1), pages 1-35, February.
    4. Grandmont, Jean-Michel, 1978. "Intermediate Preferences and the Majority Rule," Econometrica, Econometric Society, vol. 46(2), pages 317-30, March.
    5. 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.
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