Portfolio diversification and internalization of production externalities through majority voting

A general equilibrium model with uncertainty and production externalities is studied. In absence of markets for externalities, we look for governances and conditions under which majority voting among shareholders is likely to give rise to efficient internalization. Two observations leed the analysis: On the one hand, the shareholders with the right incentives for efficient internalization are those who hold the (perfectly diversified) market portfolio. On the other hand, the financial market clearing conditions puts the market portfolio at the center of gravity of the equilibrium portfolio distribution: thanks to the market mechanism, the market portfolio becomes the mean equilibrium portfolio. Combining these two observations, we propose two mean voter theorems to show that in a stakeholder democracy (one stakeholder, one vote) efficient internalization is likely to come out of a voting process among shareholders: Randomizing over exogeneous technology and endowment shocks, we show that perfect internalization is a 50%-majority stable equilibrium in large economies.