Portfolio Diversification and Internalization of Production Externalities through Majority Voting

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: A general equilibrium model with uncertainty and production externalities is studied. In absence of markets for externalities, we look for governances and conditions under which majority voting among shareholders is likely to give rise to efficient internalization. We argue that the financial market clearing conditions endogenously set up, within the firms, social choice configurations where the (perfectly diversified) market portfolio, which gives the right incentives for economic efficiency, happens to be a good (and sometimes the best) candidate in the political process, i.e., a candidate with good stability properties with respect to the majority rule. The central and natural role played by a governance of stakeholders is underlined and benchmarked.

Date: 2005-05
Note: View the original document on HAL open archive server: https://sciencespo.hal.science/hal-01065579
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