Endogenous interlocking directorates

The present paper analyzes the choice to place an executive in the board of the rival company, within a duopoly where firms with hidden marginal costs of production compete in the product market. Interlocking directorates may emerge as an equilibrium outcome whenever firms gain by exchanging information about their private costs. We show that a unilateral interlocking arises when firms have different degrees of efficiency and the direction of this interlock is affected by the degree of substitutability in the product market. Bilateral interlocking occurs only between similar firms, that is when equally inefficient firms sell substitute products or when equally efficient firms sell complement products. The equilibrium outcome is always welfare increasing for consumers.