Production in incomplete markets: expectations matter for political stability

TY - JOUR

T1 - Production in incomplete markets

T2 - expectations matter for political stability

AU - Crès, Hervé

AU - Tvede, Mich

N1 - JEL classification: D21, D52, D71, D72

PY - 2009

Y1 - 2009

N2 - 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.

AB - 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.

KW - Faculty of Social Sciences

KW - super majority voting

KW - self-fulfilling expectations

U2 - 10.1016/j.jmateco.2008.09.005

DO - 10.1016/j.jmateco.2008.09.005

M3 - Journal article

SN - 0304-4068

VL - 45

SP - 212

EP - 222

JO - Journal of Mathematical Economics

JF - Journal of Mathematical Economics

IS - 3-4

ER -