Voting on Public Goods: Citizens vs. Shareholders

Döttling, Robin, Doron Levit, Nadya Malenko and Magdalena Rola-Janicka

No 19183, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We study the interplay between a "one person-one vote" political system and a "one share-one vote" corporate governance regime. The political system sets Pigouvian subsidies, while corporate governance determines firm-specific public good investments. Our analysis highlights a two-way feedback effect. In a frictionless economy, shareholder democracy is irrelevant: the political system fully offsets any effects of shareholder influence. With frictions in public policy provision, pro-social corporations fill the void of a dysfunctional regulatory system and increase the provision of public goods-demonstrating the benefit of shareholder democracy. Nevertheless, shareholder democracy can hurt a typical citizen because of the representation problem: it favors the preferences of the wealthy. If shareholders have extreme views, there can be a backlash against ESG initiatives, and the political system may undo or tax corporate social responsibility measures. Advancements in financial technologies that increase investor diversification or enable pass-through voting have important implications for these trade-offs of shareholder democracy.

Keywords: Socially responsible investing; Public good; Carbon tax; ESG; Wealth inequality; Political backlash (search for similar items in EconPapers)
JEL-codes: D62 D72 G28 G34 G38 H23 (search for similar items in EconPapers)
Date: 2024-06
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