The Drèze and Grossman-Hart criteria for production in incomplete markets: Voting foundations and compared political stability

Crès, Hervé; Tvede, Mich

The Drèze and Grossman-Hart criteria for production in incomplete markets: Voting foundations and compared political stability

Hervé Crès and Mich Tvede

Abstract: This paper studies corporate control in a general equilibrium model with incomplete markets. At the market equilibrium, shareholders typically disagree on the way to evaluate production plans outside the market span. Hence a collective decision mechanism is needed to resolve this conflict. A mechanism proposed by Drèze (1974), resp. Grossman & Hart (1979), consists in allowing (Lindahl-like) sidepayments between final, resp. initial, shareholders. Although it is likely to exhibit desirable efficiency properties, this mechanism is difficult to implement. Another mechanism (e.g., Drèze (1985) and De-Marzo (1993)) relies on majority voting by shareholders. Since voting occurs in a multidimensional setup, super majority rules are needed to ensure existence of equilibria. We give conditions under which sidepayment equilibria are voting equilibria for the smallest rate of super majority ensuring existence. Thereby we are able to compare the relative performances of the Drèze and Grossman-Hart criteria with respect to stability in the voting mechanism. We show that the endogenization of portfolio holdings in the Drèze criterion can either help or completely jeopardize the aggregation process, depending on the shareholders' expectations. This ambivalence is absent in the Grossman-Hart criteria.

Keywords: Incomplete markets; super majority voting; sidepayments; corporate charter; self-fulfilling prophecies (search for similar items in EconPapers)
Date: 2004-03
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Citations: View citations in EconPapers (6)

Published in 2004

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Working Paper: The Dreze and Grossman-Hart criteria for production in incomplete markets: Voting foundations and compared political stability (2004)
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