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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

    as
    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. GEVERS, Louis, 1974. "Competitive equilibrium of the stock exchange and Pareto efficiency," LIDAM Reprints CORE 198, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    3. Grandmont, Jean-Michel, 1978. "Intermediate Preferences and the Majority Rule," Econometrica, Econometric Society, vol. 46(2), pages 317-330, March.
    4. 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.
    5. Peter M. DeMarzo, 1993. "Majority Voting and Corporate Control: The Rule of the Dominant Shareholder," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 60(3), pages 713-734.
    6. 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.
    7. 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.
    8. Mich Tvede & Hervé Crès, 2005. "Voting in assemblies of shareholders and incomplete markets," SciencePo Working papers Main hal-03598171, HAL.
    9. Mich Tvede & Hervé Crès, 2005. "Voting in assemblies of shareholders and incomplete markets," SciencePo Working papers hal-03598171, HAL.
    10. 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.
    11. 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.
    12. Mich Tvede & Hervé Crès, 2005. "Voting in assemblies of shareholders and incomplete markets," Post-Print hal-03598171, HAL.
    Full references (including those not matched with items on IDEAS)

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