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The Pivotal Mechanism and Organizational Control

38 Pages Posted: 4 Apr 2009 Last revised: 9 Mar 2010

Yair Listokin

Yale Law School

Date Written: April 3, 2009

Abstract

Organizations with multiple individuals typically make decisions by following the will of the majority of some subset of stakeholders that are entitled to vote. This paper examines an alternative decision-making mechanism-the "pivotal" mechanism developed by Groves and Clarke. Unlike voting, the pivotal mechanism produces efficient outcomes in the presence of heterogeneous voter preferences. Moreover, the mechanism allows control rights to be allocated more widely, reducing the costs of opportunism when a controlling class of stakeholders has interests adverse to another class. These benefits come with costs. The pivotal mechanism's efficiency diminishes in the presence of collusion between voters and requires the creation of "pools" that disperse revenues created by the mechanism. The mechanism is therefore most attractive when the costs of heterogeneity are large and the risks of collusion are small. As a result, I propose the development of a legal basis for the pivotal mechanism as a menu option for organizational decision making.

Keywords: corporate governance, voting, corporations, heterogeneity

Suggested Citation

Listokin, Yair, The Pivotal Mechanism and Organizational Control (April 3, 2009). Yale Law & Economics Research Paper No. 379. Available at SSRN: https://ssrn.com/abstract=1372822 or http://dx.doi.org/10.2139/ssrn.1372822

Yair Listokin (Contact Author)

Yale Law School ( email )

P.O. Box 208215
New Haven, CT 06520-8215
United States
203-436-2567 (Phone)

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