Production in Incomplete Markets: Expectations Matter for Political Stability
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- DP 09-01
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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 selffulfilling expectations - dramatical political instability, i.e. Condorcet cycles of length two even for very high majority rules.
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 selffulfilling expectations - dramatical political instability, i.e. Condorcet cycles of length two even for very high majority rules.
Original language | English |
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Publisher | Department of Economics, University of Copenhagen |
Number of pages | 20 |
Publication status | Published - 2009 |
- Faculty of Social Sciences - super majority voting, political (in)stability, self-fulfilling expectations
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ID: 10162456