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Voting on Public Goods: Citizens vs. Shareholders

Author

Listed:
  • Robin J. Döttling
  • Doron Y. Levit
  • Nadya Malenko
  • Magdalena A. Rola-Janicka

Abstract

We study the interplay between a "one person-one vote" political system and a "one share-one vote" corporate governance regime. The political system sets Pigouvian subsidies, while corporate governance determines firm-specific public good investments. Our analysis highlights a two-way feedback effect. In a frictionless economy, shareholder democracy is irrelevant: the political system fully offsets any effects of shareholder influence. With frictions in public policy provision, pro-social corporations fill the void of a dysfunctional regulatory system and increase the provision of public goods-demonstrating the benefit of shareholder democracy. Nevertheless, shareholder democracy can hurt a typical citizen because of the representation problem: it favors the preferences of the wealthy. If shareholders have extreme views, there can be a backlash against ESG initiatives, and the political system may undo or tax corporate social responsibility measures. Advancements in financial technologies that increase investor diversification or enable pass-through voting have important implications for these trade-offs of shareholder democracy.

Suggested Citation

  • Robin J. Döttling & Doron Y. Levit & Nadya Malenko & Magdalena A. Rola-Janicka, 2024. "Voting on Public Goods: Citizens vs. Shareholders," NBER Working Papers 32605, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:32605
    Note: CF EEE PE POL
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    More about this item

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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