Les Cahiers de Recherche - HEC Paris
The Dreze and Grossman-Hart criteria for production in incomplete markets: Voting foundations and compared political stability
() and Mich TVEDE
Abstract: This paper studies corporate control in a general
equilibrium model with incomplete markets. At the market equilibrium,
shareholders typically disagree on the way to evaluate production plans
outside the market span. Hence a collective decision mechanism is needed to
resolve this conflict. A mechanism proposed by Drèze (1974), resp. Grossman
& Hart (1979), consists in allowing (Lindahl-like) sidepayments between
final, resp. initial, shareholders. Although it is likely to exhibit
desirable efficiency properties, this mechanism is difficult to implement.
Another mechanism (e.g., Drèze (1985) and De-Marzo (1993)) relies on
majority voting by shareholders. Since voting occurs in a multidimensional
setup, super majority rules are needed to ensure existence of equilibria.
We give conditions under which sidepayment equilibria are voting equilibria
for the smallest rate of super majority ensuring existence. Thereby we are
able to compare the relative performances of the Drèze and Grossman-Hart
criteria with respect to stability in the voting mechanism. We show that
the endogenization of portfolio holding in the Drèze criterion can either
help or completely jeopardize the aggregation process, depending on the
shareholders' expectations. This ambivalence is absent in the Grossman-Hart
Keywords: incomplete markets; super majority voting; sidepayments; corporate charter; self-fulfilling prophcies; (follow links to similar papers)
JEL-Codes: D21; D52; D71; G39; (follow links to similar papers)
22 pages, March 1, 2004
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