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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. RAND Journal of Economics, 19 (4). pp. 516-537. ISSN 0741-6261.

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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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Additional Information:© 1988 RAND Corporation. We gratefully acknowledge support from Commissariat du Plan, the National Science Foundation, the Pew Charitable Trust, and the Center for Energy Policy Research at MIT. We thank Bernard Caillaud, Oliver Hart, Benjamin Harmalin, and James Poterba as well as the Editor, and Associate Editor, and a referee for helpful comments. Formerly SSWP 675.
Funding AgencyGrant Number
Commissariat du PlanUNSPECIFIED
Pew Charitable TrustUNSPECIFIED
MIT Center for Energy Policy ResearchUNSPECIFIED
Subject Keywords:Incumbents, Financial management, Investment strategies, Financial investments, Auctions, Bidding, Cost efficiency, Stock options, Contract incentives, Golden parachute
Issue or Number:4
Record Number:CaltechAUTHORS:20171109-144827999
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Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:83115
Deposited By: Jacquelyn Bussone
Deposited On:16 Nov 2017 23:40
Last Modified:03 Oct 2019 19:02

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