We explore how allowing votes to be traded separately of shares may affect the efficiency of corporate control contests. Our basic set-up and the nature of the questions continue the work of Grossman and Hart (1980), Harris and Raviv (1988), and Blair, Golbe and Gerard (1989). We consider three cases with respect to the allowable price offers (for shares and for votes when they can be traded separately): unrestricted price offers, quantity-restricted price offers, and price offers contingent on winning. Our main results are characterizations of the equilibria and of the circumstances under which vote buying is harmful. We show that allowing votes to be traded separately of shares results in inefficiencies in all the cases we study. Similarly allowing quantity-restricted offers is also harmful, but allowing conditional offers is not in itself detrimental to efficiency. The paper also makes a methodological contribution to the analysis of takeover games with atomless shareholders. It provides a way of dealing with asymmetric equilibria that must be dealt with for a complete analysis and it proves existence of an equilibrium.

We endogenize preferences using the “indirect evolutionary approach”. Individuals are randomly matched to play a two-person game. Individual (subjective) preferences determine their behaviour and may differ from the actual (objective) pay-offs that determine fitness. Matched individuals may observe the opponents' preferences perfectly, not at all, or with some in-between probability. When preferences are observable, a stable outcome must be efficient. When they are not observable, a stable outcome must be a Nash equilibrium and all strict equilibria are stable. We show that, for pure-strategy outcomes, these conclusions are robust to allowing almost perfect, and almost no, observability, with the notable exception that inefficient strict equilibria may fail to be stable with any arbitrarily small degree of observability (despite being stable with no observability).