Quadratic Vote Buying as Efficient Corporate Governance

Author: 
Eric Posner
with: 
Glen Weyl

Shareholder voting is a weak and much criticized mechanism for controlling managerial opportunism. Among other problems, shareholders are often too uninformed to vote wisely, and majority and supermajority rule permits large shareholders to exploit small shareholders. We propose a new voting system called Quadratic Vote Buying (QVB), according to which shareholders are not given voting rights but may purchase votes, with the price of votes being a quadratic function of the number of votes purchased. QVB ensures that voting outcomes are efficient under reasonable conditions. We argue that corporations should implement QVB and that the law permits them to do so. Certain legal protections for shareholders, such as the appraisal remedy, are unnecessary if QVB is implemented.