Welcome to the new version of CaltechAUTHORS. Login is currently restricted to library staff. If you notice any issues, please email coda@library.caltech.edu
Published 1988 | public
Journal Article

Repeated auctions of incentive contracts, investment, and bidding parity with an application to takeovers

Abstract

This article 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 break out in the second period. The investment may or may not be transferable to the second source, and it may be monetary or take the form of human capital. We determine whether the incumbent should be favored at the reprocurement stage, and how the slope of his incentive scheme should evolve over time. We find that the gains from second-sourcing are not so large as one might hope. Finally, we reinterpret the second source as a raider and the breakout as a takeover. We discuss the desirability of defensive tactics and obtain a rich set of testable implications concerning the size of managerial stock options, the extent of defensive tactics, the firm's performance, and the probability of a takeover.

Additional Information

© 1988 RAND Corporation. We gratefully acknowledge support from Commissariat du Plan, the National Science Foundation, the Pew Charitable Trust, and the Center for Energy Policy Research at MIT. We thank Bernard Caillaud, Oliver Hart, Benjamin Harmalin, and James Poterba as well as the Editor, and Associate Editor, and a referee for helpful comments. Formerly SSWP 675.

Additional details

Created:
August 19, 2023
Modified:
October 20, 2023