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Portfolio Diversification and Internalization of Production Externalities through Majority Voting

  • Hervé Crès
  • Mich Tvede

    (Institute of Economics)

A general equilibrium model with uncertainty and production externalities is studied. In absence of markets for externalities, we look for governances and conditions under which majority voting among shareholders is likely to give rise to efficient internalization. We argue that the financial market clearing conditions endogenously set up, within the firms, social choice configurations where the (perfectly diversified) market portfolio, which gives the right incentives for economic efficiency, happens to be a good (and sometimes the best) candidate in the political process, i.e., a candidate with good stability properties with respect to the majority rule. The central and natural role played by a governance of stakeholders is underlined and benchmarked.

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Paper provided by Sciences Po in its series Sciences Po publications with number 816/2005.

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Date of creation: May 2005
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Handle: RePEc:spo:wpmain:info:hdl:2441/10281
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  1. Cass, David & Stiglitz, Joseph E., 1970. "The structure of investor preferences and asset returns, and separability in portfolio allocation: A contribution to the pure theory of mutual funds," Journal of Economic Theory, Elsevier, vol. 2(2), pages 122-160, June.
  2. Grandmont, Jean-Michel, 1978. "Intermediate Preferences and the Majority Rule," Econometrica, Econometric Society, vol. 46(2), pages 317-30, March.
  3. Greenberg, Joseph, 1979. "Consistent Majority Rules over Compact Sets of Alternatives," Econometrica, Econometric Society, vol. 47(3), pages 627-36, May.
  4. Caplin, A. & Nalebuff, B., 1989. "Aggregation And Social Choice: A Mean Voter Theorem," Discussion Papers 1989_31, Columbia University, Department of Economics.
  5. Caplin, Andrew S & Nalebuff, Barry J, 1988. "On 64%-Majority Rule," Econometrica, Econometric Society, vol. 56(4), pages 787-814, July.
  6. 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.
  7. Simon Benninga & Eitan Muller, 1979. "Majority Choice and the Objective Function of the Firm under Uncertainty," Bell Journal of Economics, The RAND Corporation, vol. 10(2), pages 670-682, Autumn.
  8. 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.
  9. Hansen, Robert G. & Lott, John R., 1996. "Externalities and Corporate Objectives in a World with Diversified Shareholder/Consumers," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(01), pages 43-68, March.
  10. 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.
  11. 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.
  12. Bergstrom, Ted C, 1979. " When Does Majority Rule Supply Public Goods Efficiently?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 81(2), pages 216-26.
  13. Barlow, Robin, 1970. "Efficiency Aspects of Local School Finance," Journal of Political Economy, University of Chicago Press, vol. 78(5), pages 1028-40, Sept.-Oct.
  14. CRES, Hervé & TVEDE, Mich, 2004. "The Dreze and Grossman-Hart criteria for production in incomplete markets: Voting foundations and compared political stability," Les Cahiers de Recherche 794, HEC Paris.
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