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

Laffont, Jean-Jacques and Tirole, Jean (1988) Repeated Auctions of Incentive Contracts, Investment and Bidding Parity with an Application to Takeovers. Social Science Working Paper, 675. California Institute of Technology , Pasadena, CA. (Unpublished)

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This paper 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 breakout in the second. The investment may be transferable to the second source or not; and may be monetary or in human capital. The paper determines whether the incumbent should be favored at the reprocurement stage, and how the slope of his incentive scheme should evolve over time. It results from our analysis that the gains from second sourcing are not as high as one might hope. Last it reinterprets the second source as a raider, and the breakout as a takeover. It discusses the desirability of defensive tactics, and obtains a rich set of testable implications concerning the size of managerial stock options, the amount of defensive tactics, the firm's performance and the probability of a takeover.

Item Type:Report or Paper (Working Paper)
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Additional Information:Published as Laffont, Jean-Jacques, and Jean Tirole. "Repeated auctions of incentive contracts, investment, and bidding parity with an application to takeovers." The RAND Journal of Economics (1988): 516-537.
Group:Social Science Working Papers
Subject Keywords:Incentives, Second Sourcing, Bidding Parity, Auctions, Regulation
Series Name:Social Science Working Paper
Issue or Number:675
Classification Code:JEL: 026, 512, 619
Record Number:CaltechAUTHORS:20170906-142233328
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Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:81201
Deposited By: Jacquelyn Bussone
Deposited On:06 Sep 2017 21:41
Last Modified:03 Oct 2019 18:40

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