Voting on Public Goods: Citizen democracy vs. Shareholders democracy

Democracies have become of two types: citizen driven and shareholder driven. There are frictions in the two democracies in terms of what they wish from the government.

Robin J. Döttling, Doron Y. Levit, Nadya Malenko & Magdalena A. Rola-Janicka in this NBER paper sum up much of the frictions in Indian and global political economy. 

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.

The paper could have given some case studies along with all the math!