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

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  • Hervé Crès
  • Mich Tvede

    (Institute of Economics)

Abstract

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., Dr`eze (1974) and Grossman & Hart (1979)) relies on sidepayments between shareholders. The second one (see, e.g., Dr`eze (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.

Suggested Citation

  • Hervé Crès & Mich Tvede, 2001. "Proxy fights in incomplete markets: when majority voting and sidepayments are equivalent," Sciences Po publications 726/2001, Sciences Po.
  • Handle: RePEc:spo:wpmain:info:hdl:2441/10282
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    Cited by:

    1. 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.
    2. Hervé Crès, 2006. "A Geometric Study of Shareholders’ Voting in Incomplete Markets: Multivariate Median and Mean Shareholder Theorems," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 27(2), pages 377-406, October.

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    More about this item

    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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