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The Regulation of Predatory Firms

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Author Info
Antoine Faure-Grimaud
Abstract

This article investigates the issue ofpredation 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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Article provided by Blackwell Publishing in its journal Journal of Economics & Management Strategy.

Volume (Year): 6 (1997)
Issue (Month): 4 (December)
Pages: 849-876
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Handle: RePEc:bla:jemstr:v:6:y:1997:i:4:p:849-876

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  1. Ingela Alger, 2006. "Optimal Debt Contracts when Credit Managers are (Perhaps) Corruptible," Boston College Working Papers in Economics 648, Boston College Department of Economics. [Downloadable!]
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