Production in Incomplete Markets: Expectations Matter for Political Stability
26 Pages Posted: 6 Feb 2009
Date Written: January 30, 2009
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.
JEL Classification: D21, D52, D71, D72
Suggested Citation: Suggested Citation
Cres, Hervé and Tvede, Mich Palle, Production in Incomplete Markets: Expectations Matter for Political Stability (January 30, 2009). Univ. of Copenhagen Dept. of Economics Discussion Paper No. 09-01, Available at SSRN: https://ssrn.com/abstract=1338729 or http://dx.doi.org/10.2139/ssrn.1338729
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