Production in Incomplete Markets: Expectations Matter for Political Stability

26 Pages Posted: 6 Feb 2009

See all articles by Hervé Cres

Hervé Cres

HEC Paris

Mich Tvede

University of Copenhagen - Department of Economics

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

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

Hervé Cres (Contact Author)

HEC Paris ( email )

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Mich Palle Tvede

University of Copenhagen - Department of Economics ( email )

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1353 Copenhagen K.
Denmark
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45 35 32 30 85 (Fax)

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