Production in incomplete markets: Expectations matter for political stability

Hervé Crès () and Mich Tvede
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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

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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.

Date: 2009-03
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Published in Journal of Mathematical Economics, 2009, 45 (3-4), pp.212-222. ⟨10.1016/j.jmateco.2008.09.005⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:spmain:hal-01022731

DOI: 10.1016/j.jmateco.2008.09.005

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