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Predatory Governance

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Author Info
Dalida Kadyrzhanova

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Abstract

This paper argues that imperfect corporate control is a determinant of market structure. We integrate a widely accepted version of the separation of ownership and control -- Jensen's (1986) 'empire-building' hypothesis -- into a dynamic oligopoly model. Our main observation is that, due to product market competition, shareholders face an endogenous opportunity cost of governance. We derive shareholders' optimal governance choices and show analytically that governance has a first-order effect on firms' dynamic incentives and leads to increasing dominance and predation. Through numerical simulations we demonstrate that imperfect corporate control has a sizable adverse impact on market structure and consumer welfare. It results in low turnover, high concentration, persistently monopolized markets, and low industry-wide investment. As a consequence, consumer welfare is significantly - up to thirty percent - lower than in otherwise identical industries with full corporate control. These results suggest a role for public policy toward corporate governance as an effective pro-competitive tool.

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2005 with number 421.

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Date of creation: 11 Nov 2005
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Handle: RePEc:sce:scecf5:421

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Web page: http://comp-econ.org/
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Related research
Keywords: Managerial Preferences Optimal Governance Dynamic Oligopoly Markov Perfect Equilibrium

Find related papers by JEL classification:
L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
C63 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Computational Techniques

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  19. Peter MacKay & Gordon M. Phillips, 2005. "How Does Industry Affect Firm Financial Structure?," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 18(4), pages 1433-1466. [Downloadable!] (restricted)
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    Other versions:
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    Other versions:
  31. David Besanko & Ulrich Doraszelski, 2004. "Capacity Dynamics and Endogenous Asymmetries in Firm Size," RAND Journal of Economics, The RAND Corporation, vol. 35(1), pages 23-49, Spring.
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