Abstract
The paper examines the consolidation problem in a model characterized by non-contractible, relationship specific investments, transferable and non-transferable payoffs, and ex post actions that are chosen after the uncertainty in the model is realized. We determine the relationship between the optimal ownership structure and the nature of the relationship specific investments and ex post actions and the degree to which payoffs are transferable with ownership.
Highlights
Consolidation is a growing trend in both established and relatively new industries, e.g. automobiles, electronics, biotechnology, retailing, telecommunications, and transportation
The paper examines the consolidation problem in a model characterized by non-contractible, relationship specific investments, transferable and non-transferable payoffs, and ex post actions that are chosen after the uncertainty in the model is realized
We determine the relationship between the optimal ownership structure and the nature of the relationship specific investments and ex post actions and the degree to which payoffs are transferable with ownership
Summary
Consolidation is a growing trend in both established and relatively new industries, e.g. automobiles, electronics, biotechnology, retailing, telecommunications, and transportation. The incentives for exchange of ownership are provided by the payoffs associated with the relationship specificity of the investments. Managers may have incentives to invest that relate to their ownership of the shares in the two firms, if there is a consolidation. The ownership structure influences both the transferable payoff and the private incentives of the managers. The degree of complementarity or substitutability of the actions that are taken after investments are made affects incentives of the managers to invest and the optimal ownership structure. The second-best solutions can be intuitively characterized using standard economic tools We generalize these results on consolidation by introducing control rights which affect the optimal ownership structure and associated investments and actions of the managers
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