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

  • CRES, Herve
  • TVEDE, Mich

    (Institute of Economics, University of Copenhagen)

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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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
Contact details of provider: Postal: HEC Paris, 78351 Jouy-en-Josas cedex, France
Web page: http://www.hec.fr/

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  1. Hayne E. Leland, 1973. "Production Theory and the Stock Market," Cowles Foundation Discussion Papers 361, Cowles Foundation for Research in Economics, Yale University.
  2. Dierker, E. & Dierker, H. & Grobal, B., 1999. "Incomplete Markets and the Firm," Papers 99-03, Carleton - School of Public Administration.
  3. John Geanakoplos & Michael Magill & Martine Quinzii & J. Dreze, 1988. "Generic Inefficiency of Stock Market Equilibrium When Markets Are Incomplete," Cowles Foundation Discussion Papers 863, Cowles Foundation for Research in Economics, Yale University.
  4. Cohen, Linda, 1979. "Cyclic sets in multidimensional voting models," Journal of Economic Theory, Elsevier, vol. 20(1), pages 1-12, February.
  5. Ferejohn, John A. & Grether, David M., . "On a Class of Rational Social Decision Procedures," Working Papers 25, California Institute of Technology, Division of the Humanities and Social Sciences.
  6. CRES, Herve, 2000. "Majority stable production equilibria : a multivariate mean shareholders theorem," Les Cahiers de Recherche 706, HEC Paris.
  7. Greenberg, Joseph, 1979. "Consistent Majority Rules over Compact Sets of Alternatives," Econometrica, Econometric Society, vol. 47(3), pages 627-36, May.
  8. 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.
  9. Caplin, Andrew S & Nalebuff, Barry J, 1988. "On 64%-Majority Rule," Econometrica, Econometric Society, vol. 56(4), pages 787-814, July.
  10. Kramer, Gerald H, 1973. "On a Class of Equilibrium Conditions for Majority Rule," Econometrica, Econometric Society, vol. 41(2), pages 285-97, March.
  11. Grossman, Sanford J & Hart, Oliver D, 1979. "A Theory of Competitive Equilibrium in Stock Market Economies," Econometrica, Econometric Society, vol. 47(2), pages 293-329, March.
  12. Caplin, A. & Nalebuff, B., 1989. "Aggregation And Social Choice: A Mean Voter Theorem," Discussion Papers 1989_31, Columbia University, Department of Economics.
  13. Schofield, Norman, 1978. "Instability of Simple Dynamic Games," Review of Economic Studies, Wiley Blackwell, vol. 45(3), pages 575-94, October.
  14. Steinar Ekern & Robert Wilson, 1974. "On the Theory of the Firm in an Economy with Incomplete Markets," Bell Journal of Economics, The RAND Corporation, vol. 5(1), pages 171-180, Spring.
  15. McKelvey, Richard D, 1979. "General Conditions for Global Intransitivities in Formal Voting Models," Econometrica, Econometric Society, vol. 47(5), pages 1085-1112, September.
  16. Alessandro Citanna & Antonio Villanacci, 2004. "Pooling and endogenous market incompleteness," Economic Theory, Springer, vol. 24(3), pages 549-560, October.
  17. 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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