Skip to Main content Skip to Navigation
Reports

The Drèze and Grossman-Hart criteria for production in incomplete markets: Voting foundations and compared political stability

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 holdings 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 criteria.
Complete list of metadatas

https://hal-hec.archives-ouvertes.fr/hal-00591676
Contributor : Antoine Haldemann <>
Submitted on : Monday, May 9, 2011 - 9:49:49 PM
Last modification on : Thursday, January 11, 2018 - 6:19:32 AM

Identifiers

  • HAL Id : hal-00591676, version 1

Collections

Citation

Hervé Crès, Mich Tvede. The Drèze and Grossman-Hart criteria for production in incomplete markets: Voting foundations and compared political stability. 2004. ⟨hal-00591676⟩

Share

Metrics

Record views

142