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

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  • Jean Tirole
  • Jean-Jaques Laffont

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

Paper provided by Massachusetts Institute of Technology (MIT), Department of Economics in its series Working papers with number 463.

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Date of creation: Sep 1987
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Handle: RePEc:mit:worpap:463

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Postal: MASSACHUSETTS INSTITUTE OF TECHNOLOGY (MIT), DEPARTMENT OF ECONOMICS, 50 MEMORIAL DRIVE CAMBRIDGE MASSACHUSETTS 02142 USA
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Cited by:
  1. Pierre Chaigneau, 2010. "The Optimal Timing of Executive Compensation," FMG Discussion Papers dp660, Financial Markets Group.
  2. Yildirim, Huseyin, 2004. "Piecewise procurement of a large-scale project," International Journal of Industrial Organization, Elsevier, vol. 22(8-9), pages 1349-1375, November.
  3. Iossa, Elisabetta & Legros, Patrick, 2001. "Third Party Monitoring and Golden Parachutes," CEPR Discussion Papers 2777, C.E.P.R. Discussion Papers.
  4. Sappington, David E.M. & DEC, 1994. "Principles of regulatory policy design," Policy Research Working Paper Series 1239, The World Bank.
  5. Jeremy C. Stein, 1996. "Rational Capital Budgeting in an Irrational World," NBER Working Papers 5496, National Bureau of Economic Research, Inc.
  6. Caspar Rose, 2002. "Corporate Financial Performance and the Use of Takeover Defenses," European Journal of Law and Economics, Springer, vol. 13(2), pages 91-112, March.
  7. R. Benabou & J. Tirole, 1999. "Self-Confidence and Social Interactions," Princeton Economic Theory Papers 00s2, Economics Department, Princeton University.
  8. Mark Armstrong & David E.M. Sappington, 2006. "Regulation, Competition and Liberalization," Journal of Economic Literature, American Economic Association, vol. 44(2), pages 325-366, June.
  9. Levine, Ross & Zervos, Sara, 1996. "Stock Market Development and Long-Run Growth," World Bank Economic Review, World Bank Group, vol. 10(2), pages 323-39, May.
  10. Klenio Barbosa & Pierre C. Boyer, 2012. "Discrimination in Dynamic Procurement Design with Learning-by-doing," CESifo Working Paper Series 3947, CESifo Group Munich.
  11. Audrey Hu & Liang Zhou, 2007. "Selecting less Corruptible Bureaucrats," Tinbergen Institute Discussion Papers 07-096/1, Tinbergen Institute.
  12. McGuire, Thomas G. & Riordan, Michael H., 1995. "Incomplete information and optimal market structure public purchases from private providers," Journal of Public Economics, Elsevier, vol. 56(1), pages 125-141, January.
  13. Klênio de Souza Barbosa & Pierre C. Boyer, 2011. "Competition for Local Public Services with Learning-by-doing and Transferability," Working Papers 06-2011, Universidade de São Paulo, Faculdade de Economia, Administração e Contabilidade de Ribeirão Preto.
  14. 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 2000-9, Federal Reserve Bank of Atlanta.

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