Production in incomplete markets: Expectations matter for political stability

H. CRES, M. Tvede

Journal of Mathematical Economics

2009, vol. 45, n°3-4

Departments: Finance

Keywords: Incomplete markets, Super majority voting, Political (in)stability, Self-fulfilling expectations

en ligne le 22/09/2008In the present paper we study voting-based corporate control in a general equilibriummodel with incomplete financial markets. Since voting takes place in amulti-dimensional setting, super-majority rules are needed to ensure existenceof equilibrium. In a linear-quadratic setup we show that the endogenizationof voting weights (given by portfolio holdings) can give rise to - through selffulfillingexpectations - dramatical political instability, i.e. Condorcet cyclesof length two even for very high majority rules.Keywords: Incomplete markets, super majority voting, political (in)stability,selfulfilling expectations.