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The Regulation of Predatory Firms

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  • Antoine Faure-Grimaud
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    Abstract

    This article investigates the issue of predation by a regulated firm. Since it has private information, a regulated firm obtains higher rents in case of successful predation: the fewer the competitors, the higher the marginal social value of the regulated firm's effort and the higher the informational rents. Both principals (the investor of a "target" firm and the regulator) have to provide some incentives to prevent predation: the investor has to reduce the sensitivity of refinancing to predation; the regulator has to lower the gain of successful predation. It is shown that there is a trade-off between the power of the regulatory incentive scheme and the regulated firm's incentives to prey. In addition, as deterring predation is costly, the investor and the regulator compete when offering contracts: each wants to free-ride on the other. Hence, predation may occur in equilibrium although it makes both principals worse off. Copyright (c) 1997 Massachusetts Institute of Technology.

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    Bibliographic Info

    Article provided by Wiley Blackwell in its journal Journal of Economics & Management Strategy.

    Volume (Year): 6 (1997)
    Issue (Month): 1 (06)
    Pages: 425-451

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    Handle: RePEc:bla:jemstr:v:6:y:1997:i:1:p:425-451

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    Web page: http://www.kellogg.northwestern.edu/research/journals/JEMS/

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    Web: http://www.blackwellpublishing.com/journal.asp?ref=1058-6407&site=1

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    Cited by:
    1. Fernandez-Ruiz, Jorge, 2004. "Predation due to adverse selection in financial markets," International Journal of Industrial Organization, Elsevier, vol. 22(5), pages 715-733, May.
    2. Arping, Stefan & Diaw, Khaled M., 2008. "Sunk costs, entry deterrence, and financial constraints," International Journal of Industrial Organization, Elsevier, vol. 26(2), pages 490-501, March.
    3. Arve, Malin, 2013. "Procurement and Predation: Dynamic Sourcing from Financially Constrained Suppliers," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 441, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    4. Aldo González Tissinetti, 2006. "Antitrust and Regulation, Complements or Substitutes? The Case of a Vertically Integrated Firm," Working Papers wp225, University of Chile, Department of Economics.
    5. Carlos Pérez Montes, 2011. "Optimal capital structure and Regulatory Control," Banco de Espa�a Working Papers 1128, Banco de Espa�a.
    6. Ingela Alger, 2006. "Optimal Debt Contracts when Credit Managers are (Perhaps) Corruptible," Boston College Working Papers in Economics 648, Boston College Department of Economics.

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