IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Predatory Governance

  • Dalida Kadyrzhanova

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.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://repec.org/sce2005/up.15357.1107233869.pdf
Download Restriction: no

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

as
in new window

Length:
Date of creation: 11 Nov 2005
Date of revision:
Handle: RePEc:sce:scecf5:421
Contact details of provider: Web page: http://comp-econ.org/
Email:


More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Kyle Bagwell & Garey Ramey & Daniel F. Spulber, 1997. "Dynamic Retail Price and Investment Competition," RAND Journal of Economics, The RAND Corporation, vol. 28(2), pages 207-227, Summer.
  2. Luis M.B. Cabral & Michael Riordan, 1992. "The Learning Curve, Market Dominance and Predatory Pricing," Papers 0039, Boston University - Industry Studies Programme.
  3. Oliver Hart, 2001. "Financial Contracting," Harvard Institute of Economic Research Working Papers 1924, Harvard - Institute of Economic Research.
  4. Mike Burkart & Denis Gromb & Fausto Panunzi, 1997. "Large Shareholders, Monitoring, and the Value of the Firm," The Quarterly Journal of Economics, Oxford University Press, vol. 112(3), pages 693-728.
  5. Athey, Susan & Schmutzler, Armin, 2001. "Investment and Market Dominance," RAND Journal of Economics, The RAND Corporation, vol. 32(1), pages 1-26, Spring.
  6. Paul Gompers & Joy Ishii & Andrew Metrick, 2003. "Corporate Governance and Equity Prices," The Quarterly Journal of Economics, Oxford University Press, vol. 118(1), pages 107-156.
  7. David Besanko & Ulrich Doraszelski, 2002. "Capacity Dynamics and Endogenous Asymmetries in Firm Size," Computing in Economics and Finance 2002 196, Society for Computational Economics.
  8. Kole, Stacey R & Lehn, Kenneth, 1997. "Deregulation, the Evolution of Corporate Governance Structure, and Survival," American Economic Review, American Economic Association, vol. 87(2), pages 421-25, May.
  9. Marianne Bertrand & Sendhil Mullainathan, 2003. "Enjoying the Quiet Life? Corporate Governance and Managerial Preferences," Journal of Political Economy, University of Chicago Press, vol. 111(5), pages 1043-1075, October.
  10. Maskin, Eric & Tirole, Jean, 2001. "Markov Perfect Equilibrium: I. Observable Actions," Journal of Economic Theory, Elsevier, vol. 100(2), pages 191-219, October.
  11. Zingales, Luigi, 1998. "Survival of the Fittest or the Fattest? Exit and Financing in the Trucking Industry," CEPR Discussion Papers 1778, C.E.P.R. Discussion Papers.
  12. Chaim Fershtman & Kenneth L Judd, 1984. "Equilibrium Incentives in Oligopoly," Discussion Papers 642, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  13. Peter MacKay & Gordon M. Phillips, 2005. "How Does Industry Affect Firm Financial Structure?," Review of Financial Studies, Society for Financial Studies, vol. 18(4), pages 1433-1466.
  14. Bronwyn H. Hall & Zvi Griliches & Jerry A. Hausman, 1984. "Patents and R&D: Is There A Lag?," NBER Working Papers 1454, National Bureau of Economic Research, Inc.
  15. Lott, Jr., John R., 1999. "Are Predatory Commitments Credible?," University of Chicago Press Economics Books, University of Chicago Press, edition 1, number 9780226493558, July.
  16. Murphy, Kevin J., 1985. "Corporate performance and managerial remuneration : An empirical analysis," Journal of Accounting and Economics, Elsevier, vol. 7(1-3), pages 11-42, April.
  17. Schmidt, Klaus M., 1997. "Managerial Incentives and Product Market Competition," Munich Reprints in Economics 19772, University of Munich, Department of Economics.
  18. Cabral, Luis M B & Riordan, Michael H, 1997. "The Learning Curve, Predation, Antitrust, and Welfare," Journal of Industrial Economics, Wiley Blackwell, vol. 45(2), pages 155-69, June.
  19. Bolton, Patrick & Scharfstein, David S, 1990. "A Theory of Predation Based on Agency Problems in Financial Contracting," American Economic Review, American Economic Association, vol. 80(1), pages 93-106, March.
  20. Lach, Saul & Schankerman, Mark, 1989. "Dynamics of R&D and Investment in the Scientific Sector," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 880-904, August.
  21. Klaus M. Schmidt, 1997. "Managerial Incentives and Product Market Competition," Review of Economic Studies, Oxford University Press, vol. 64(2), pages 191-213.
  22. Vickers, John S, 1986. "The Evolution of Market Structure When There Is a Sequence of Innovations," Journal of Industrial Economics, Wiley Blackwell, vol. 35(1), pages 1-12, September.
  23. Steven D. Sklivas, 1987. "The Strategic Choice of Managerial Incentives," RAND Journal of Economics, The RAND Corporation, vol. 18(3), pages 452-458, Autumn.
  24. Michael Raith, 2003. "Competition, Risk, and Managerial Incentives," American Economic Review, American Economic Association, vol. 93(4), pages 1425-1436, September.
  25. Kole, Stacey R. & Lehn, Kenneth M., 1999. "Deregulation and the adaptation of governance structure: the case of the U.S. airline industry," Journal of Financial Economics, Elsevier, vol. 52(1), pages 79-117, April.
  26. Christopher Budd & Christopher Harris & John Vickers, 1993. "A Model of the Evolution of Duopoly: Does the Asymmetry between Firms Tend to Increase or Decrease?," Review of Economic Studies, Oxford University Press, vol. 60(3), pages 543-573.
  27. James Dow & Gary Gorton & Arvind Krishnamurthy, 2005. "Equilibrium Investment and Asset Prices under Imperfect Corporate Control," American Economic Review, American Economic Association, vol. 95(3), pages 659-681, June.
  28. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
  29. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May.
  30. McGee, John S, 1980. "Predatory Pricing Revisited," Journal of Law and Economics, University of Chicago Press, vol. 23(2), pages 289-330, October.
  31. Richard Ericson & Ariel Pakes, 1995. "Markov-Perfect Industry Dynamics: A Framework for Empirical Work," Review of Economic Studies, Oxford University Press, vol. 62(1), pages 53-82.
  32. Edlin, Aaron S., 2001. "Stopping Above-Cost Predatory Pricing," Berkeley Olin Program in Law & Economics, Working Paper Series qt92s8h65w, Berkeley Olin Program in Law & Economics.
  33. David Scharfstein, 1988. "Product-Market Competition and Managerial Slack," RAND Journal of Economics, The RAND Corporation, vol. 19(1), pages 147-155, Spring.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:sce:scecf5:421. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.