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The Drèze and Grossman-Hart criteria for production in incomplete markets: Voting foundations and compared political stability

Author

Listed:
  • Hervé Crès

    (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique)

  • Mich Tvede

Abstract

This paper studies corporate control in a general equilibrium model with incomplete markets. At the market equilibrium, shareholders typically disagree on the way to evaluate production plans outside the market span. Hence a collective decision mechanism is needed to resolve this conflict. A mechanism proposed by Drèze (1974), resp. Grossman & Hart (1979), consists in allowing (Lindahl-like) sidepayments between final, resp. initial, shareholders. Although it is likely to exhibit desirable efficiency properties, this mechanism is difficult to implement. Another mechanism (e.g., Drèze (1985) and De-Marzo (1993)) relies on majority voting by shareholders. Since voting occurs in a multidimensional setup, super majority rules are needed to ensure existence of equilibria. We give conditions under which sidepayment equilibria are voting equilibria for the smallest rate of super majority ensuring existence. Thereby we are able to compare the relative performances of the Drèze and Grossman-Hart criteria with respect to stability in the voting mechanism. We show that the endogenization of portfolio holdings in the Drèze criterion can either help or completely jeopardize the aggregation process, depending on the shareholders' expectations. This ambivalence is absent in the Grossman-Hart criteria.

Suggested Citation

  • Hervé Crès & Mich Tvede, 2004. "The Drèze and Grossman-Hart criteria for production in incomplete markets: Voting foundations and compared political stability," Working Papers hal-00591676, HAL.
    • Handle: RePEc:hal:wpaper:hal-00591676
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    Cited by:

    1. Hervé Crès & Mich Tvede, 2005. "Portfolio Diversification and Internalization of Production Externalities through Majority Voting," SciencePo Working papers hal-01065579, HAL.
    2. repec:spo:wpecon:info:hdl:2441/10281 is not listed on IDEAS
    3. Hervé Crès & Mich Tvede, 2005. "Portfolio Diversification and Internalization of Production Externalities through Majority Voting," Working Papers hal-00587205, HAL.
    4. Hervé Crès & Mich Tvede, 2005. "Portfolio Diversification and Internalization of Production Externalities through Majority Voting," Sciences Po Economics Publications (main) hal-01065579, HAL.
    5. repec:spo:wpmain:info:hdl:2441/10281 is not listed on IDEAS

    More about this item

    Keywords

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    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D71 - Microeconomics - - Analysis of Collective Decision-Making - - - Social Choice; Clubs; Committees; Associations
    • G39 - Financial Economics - - Corporate Finance and Governance - - - Other

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