Repeated Auctions of Incentive Contracts, Investment and Bidding Parity with an Application to Takeovers
- Creators
- Laffont, Jean-Jacques
- Tirole, Jean
Abstract
This paper considers a two-period model of natural monopoly and second sourcing. The incumbent supplier invests in the first period. After observing the incumbent's first-period performance, the buyer may breakout in the second. The investment may be transferable to the second source or not; and may be monetary or in human capital. The paper determines whether the incumbent should be favored at the reprocurement stage, and how the slope of his incentive scheme should evolve over time. It results from our analysis that the gains from second sourcing are not as high as one might hope. Last it reinterprets the second source as a raider, and the breakout as a takeover. It discusses the desirability of defensive tactics, and obtains a rich set of testable implications concerning the size of managerial stock options, the amount of defensive tactics, the firm's performance and the probability of a takeover.
Additional Information
Published as Laffont, Jean-Jacques, and Jean Tirole. "Repeated auctions of incentive contracts, investment, and bidding parity with an application to takeovers." The RAND Journal of Economics (1988): 516-537.Attached Files
Submitted - sswp675.pdf
Files
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Additional details
- Eprint ID
- 81201
- Resolver ID
- CaltechAUTHORS:20170906-142233328
- Created
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2017-09-06Created from EPrint's datestamp field
- Updated
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2019-10-03Created from EPrint's last_modified field
- Caltech groups
- Social Science Working Papers
- Series Name
- Social Science Working Paper
- Series Volume or Issue Number
- 675