Collective Decision Mechanisms and Efficient Stock Market Allocations: Existence of a Participation Equilibrium

Abstract

The recent literature on economies with an incomplete set of markets has been devoted to the study of the efficiency properties of collective stockholder decision mechanisms for guiding the behavior of firms when the restrictive Ekern-Wilson spanning condition is not satisfied. The results have been essentially negative; a majority voting rule and controlling interest rules will not yield efficient equilibrium allocations in general. However, in a recent paper, Helpman and Razin (1978) suggested a decision rule that assures constrained Pareto optimality of equilibrium allocations. Their rule is patterned on the recent contributions to the theory of incentive compatibility. In this paper, we show that an equilibrium relative to the Helpman-Razin Mechanism rarely exists, making their optimality result essentially vacuous. We then demonstrate that an equilibrium does exist in general relative to the Shared Cost Mechanism developed by Hurwicz (1976), and that all equilibrium allocations in the Helpman-Razin model are constrained Pareto optima. Finally, we suggest that the optimality of equilibrium allocations is as much a consequence of how technology is modeled as of the incentives induced by the decision mechanism. Existence, on the other hand, is very sensitive in general to the decision mechanism adopted.