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Repeated Auctions of Incentive Contracts, Investment, and Bidding Parity with an Application to Takeovers

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  • Jean-Jacques Laffont
  • Jean Tirole

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.

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Bibliographic Info

Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 19 (1988)
Issue (Month): 4 (Winter)
Pages: 516-537

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Handle: RePEc:rje:randje:v:19:y:1988:i:winter:p:516-537

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Cited by:
  1. Klenio Barbosa & Pierre C. Boyer, 2012. "Discrimination in Dynamic Procurement Design with Learning-by-doing," CESifo Working Paper Series, CESifo Group Munich 3947, CESifo Group Munich.
  2. Jeremy C. Stein, 1996. "Rational Capital Budgeting in an Irrational World," NBER Working Papers 5496, National Bureau of Economic Research, Inc.
  3. Levine, Ross & Zervos, Sara, 1996. "Stock Market Development and Long-Run Growth," World Bank Economic Review, World Bank Group, World Bank Group, vol. 10(2), pages 323-39, May.
  4. Pierre Chaigneau, 2010. "The Optimal Timing of Executive Compensation," FMG Discussion Papers, Financial Markets Group dp660, Financial Markets Group.
  5. Sappington, David E.M. & DEC, 1994. "Principles of regulatory policy design," Policy Research Working Paper Series, The World Bank 1239, The World Bank.
  6. Benabou, R. & Tirole, J., 2000. "Self-Confidence and Social Interactions," Papers, Princeton, Woodrow Wilson School - Public and International Affairs 210, Princeton, Woodrow Wilson School - Public and International Affairs.
  7. Klênio de Souza Barbosa & Pierre C. Boyer, 2011. "Competition for Local Public Services with Learning-by-doing and Transferability," Working Papers, Universidade de São Paulo, Faculdade de Economia, Administração e Contabilidade de Ribeirão Preto 06-2011, Universidade de São Paulo, Faculdade de Economia, Administração e Contabilidade de Ribeirão Preto.
  8. Iossa, Elisabetta & Legros, Patrick, 2001. "Third Party Monitoring and Golden Parachutes," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2777, C.E.P.R. Discussion Papers.
  9. Caspar Rose, 2002. "Corporate Financial Performance and the Use of Takeover Defenses," European Journal of Law and Economics, Springer, Springer, vol. 13(2), pages 91-112, March.
  10. McGuire, Thomas G. & Riordan, Michael H., 1995. "Incomplete information and optimal market structure public purchases from private providers," Journal of Public Economics, Elsevier, Elsevier, vol. 56(1), pages 125-141, January.
  11. Mark Armstrong & David E.M. Sappington, 2006. "Regulation, Competition and Liberalization," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 44(2), pages 325-366, June.
  12. Ann B. Gillette & Thomas H. Noe, 2000. "If at first you don't succeed: an experimental investigation of the impact of repetition options on corporate takeovers," Working Paper, Federal Reserve Bank of Atlanta 2000-9, Federal Reserve Bank of Atlanta.
  13. Audrey Hu & Liang Zhou, 2007. "Selecting less Corruptible Bureaucrats," Tinbergen Institute Discussion Papers, Tinbergen Institute 07-096/1, Tinbergen Institute.
  14. Yildirim, Huseyin, 2004. "Piecewise procurement of a large-scale project," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 22(8-9), pages 1349-1375, November.

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