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Production in incomplete markets: Expectations matter for political stability

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.
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  • HAL Id : hal-01022731, version 1
  • SCIENCESPO : 2441/10267

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Hervé Crès, Mich Tvede. Production in incomplete markets: Expectations matter for political stability. Journal of Mathematical Economics, Elsevier, 2009, 45 (3-4), pp.212-222. ⟨hal-01022731⟩

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