Production in incomplete markets: Expectations matter for political stability

Hervé Crès (1) , Mich Tvede (2)

1 ECON - Département d'économie (Sciences Po)
2 Department of Economics [Copenhagen]

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.

Domains: Economics and Finance

Hervé Crès, Mich Tvede. Production in incomplete markets: Expectations matter for political stability. Journal of Mathematical Economics, 2009, 45 (3-4), pp.212-222. ⟨10.1016/j.jmateco.2008.09.005⟩. ⟨hal-01022731⟩