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Production in incomplete markets: Expectations matter for political stability

Lookup NU author(s): Professor Mich Tvede

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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.

Publication metadata

Author(s): Cres H, Tvede M

Publication type: Article

Publication status: Published

Journal: Journal of Mathematical Economics

Year: 2009

Volume: 45

Issue: 3-4

Pages: 212-222

ISSN (print): 0304-4068

ISSN (electronic): 1873-1538

Publisher: Elsevier BV

URL: http://dx.doi.org/10.1016/j.jmateco.2008.09.005

DOI: 10.1016/j.jmateco.2008.09.005

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