Production in incomplete markets: Expectations matter for political stability

Hervé Crès, Mich Tvede

Research output: Contribution to journalArticle

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.

Original languageEnglish (US)
Pages (from-to)212-222
Number of pages11
JournalJournal of Mathematical Economics
Volume45
Issue number3-4
DOIs
StatePublished - Mar 20 2009

Keywords

  • Incomplete markets
  • Political (in)stability
  • Self-fulfilling expectations
  • Super majority voting

ASJC Scopus subject areas

  • Economics and Econometrics
  • Applied Mathematics

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