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Production in incomplete markets: Expectations matter for political stability

Author

Listed:
  • Hervé Crès

    (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique)

  • Mich Tvede

    (Department of Economics [Copenhagen] - Faculty of Social Sciences [Copenhagen] - UCPH - University of Copenhagen = Københavns Universitet)

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.

Suggested Citation

  • Hervé Crès & Mich Tvede, 2009. "Production in incomplete markets: Expectations matter for political stability," SciencePo Working papers Main hal-01022731, HAL.
    • Handle: RePEc:hal:spmain:hal-01022731
    DOI: 10.1016/j.jmateco.2008.09.005
    Note: View the original document on HAL open archive server: https://sciencespo.hal.science/hal-01022731
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    References listed on IDEAS

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    1. 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.
    2. Mich Tvede & Hervé Crés, 2005. "Voting in assemblies of shareholders and incomplete markets," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 26(4), pages 887-906, November.
    3. Mich Tvede & Hervé Crès, 2005. "Voting in assemblies of shareholders and incomplete markets," SciencePo Working papers hal-03598171, HAL.
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    8. Mich Tvede & Hervé Crès, 2005. "Voting in assemblies of shareholders and incomplete markets," Post-Print hal-03598171, HAL.
    9. Louis Gevers, 1974. "Competitive Equilibrium of the Stock Exchange and Pareto Efficiency," International Economic Association Series, in: Jacques H. Drèze (ed.), Allocation under Uncertainty: Equilibrium and Optimality, chapter 10, pages 167-191, Palgrave Macmillan.
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    12. Mich Tvede & Hervé Crès, 2005. "Voting in assemblies of shareholders and incomplete markets," SciencePo Working papers Main hal-03598171, HAL.
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