A Bargaining Model of Friendly and Hostile Takeovers

A bargaining model is developed that characterizes the conditions under which a takeover will either be friendly, hostile, or unsuccessful when the target management can tilt the selling procedure toward a white knight. The conditions considered mainly involve private control benefits, toehold size, and breakup fees. Also established by the model are the conditions for an efficient takeover. The proposed framework of strong management influence on takeover outcome, an alternative modeling of hostility and the adoption of a negotiation procedure, rather than an auction setup with strong shareholder influence as in most of the existing literature, delivers new insights into the US market of corporate control, which are consistent with the available evidence.     

Competing engines of growth: Innovation and standardization

We study a dynamic general equilibrium model where innovation takes the form of the introduction of new goods whose production requires skilled workers. Innovation is followed by a costly process of standardization, whereby these new goods are adapted to be produced using unskilled labor. Our framework highlights a number of novel results. First, standardization is both an engine of growth and a potential barrier to it. As a result, growth is an inverse U-shaped function of the standardization rate (and of competition). Second, we characterize the growth and welfare maximizing speed of standardization. We show how optimal protection of intellectual property rights affecting the cost of standardization vary with the skill-endowment, the elasticity of substitution between goods and other parameters. Third, we show that, depending on how competition between innovating and standardizing firms is modelled and on parameter values, a new type of multiplicity of equilibria may arise. Finally, we study the implications of our model for the skill premium and we illustrate novel reasons for linking North–South trade to intellectual property rights protection.     

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Pricing policies for services by facilities with Weibull lifetimes

To make good profits, pricing is a competitive weapon of service firms. This paper is concerned with pricing strategies for services with substantial facility maintenance costs. To address the problem, a mathematical framework that incorporates service demand and facility deterioration is proposed. The facility and customers constitute a service system driven by Poisson arrivals and exponential service times. The most common log-linear customer demand and Weibull-distributed facility lifetime are also adopted. By examining the linkage between customer demand and facility deterioration in profit model, pricing policies of the service are investigated. Then analytical conditions of customer demand and facility lifetime are derived to achieve a unique optimal pricing policy. Finally, numerical examples are presented to illustrate the effects of parameter variations on the optimal pricing policy.     

Optimal and efficient takeover contests with toeholds

Target firms often face a takeover threat from raiders with prior stakes in its ownership (toeholds). Previous literature has shown that, when takeovers are modeled as standard auctions, toeholds induce more aggressive bids from raiders, which has two important consequences for the selling process: (i) the board of directors is no longer indifferent about the sale procedure used to get the highest price, and (ii) the target may not be assigned to the highest-value raider. This paper characterizes how the price-maximizing procedure should be in the presence of asymmetric toeholds. Our central result is that the optimal rule needs to be implemented by a discriminatory mechanism quite different from conventional auction formats. By imposing an extra-charge against high-toehold bidders, the optimal mechanism is able to extract more surplus from raiders who bid more aggressively. As a result, nonbidding shareholders benefit unambiguously from the toehold asymmetry. Furthermore, as this bias restores the symmetry in bidders’ expected payoffs, the proposed mechanism also allows to allocate efficiently the target among them.     

Auctions vs. negotiations in takeovers with initial stakes

Takeover attempts from raiders with prior stakes in the target company (toeholds) are frequent in the market for corporate control. In this context, we propose a simple and realistic selling mechanism with an agenda of exclusive negotiations that discriminates against larger-toehold raiders. When a reserve price is absent, it is shown that this negotiation procedure outperforms, in terms of expected target price, conventional auctions frequently used to model takeover battles. However, when standard auctions can be improved with an optimal reserve price, our results indicate that this target price superiority is sensitive to the degree of toehold asymmetry.     

Shortfall risk minimisation versus symmetric (quadratic) hedging

Abstract We consider the seller of a contingent claim who wants to hedge against the corresponding risk by means of a self-financing strategy, endowing less initial capital than the one required for (super)hedging. Two classical criteria used in this situation are shortfall risk minimisation and symmetric hedging (a natural generalisation of the quadratic hedging problem). We show that these two problems are equivalent if the market is complete. The case when the market is incomplete is also discussed. Mathematics Subject Classification (2000): 91B28, 91B70, 93E20 Journal of Economic Literature Classification: D81, G11     

Monetary policy under model and data-parameter uncertainty

Empirical Taylor rules are much less aggressive than those derived from optimization-based models. This paper analyzes whether accounting for uncertainty across competing models and (or) real-time data considerations can explain this discrepancy. It considers a central bank that chooses a Taylor rule in a framework that allows for an aversion to the second-order risk associated with facing multiple models and measurement-error configurations. The paper finds that if the central bank cares strongly enough about stabilizing the output gap, this aversion leads to significant declines in the coefficients of the Taylor rule even if the central bank's loss function assigns little weight to reducing interest rate variability. Furthermore, a small degree of aversion can generate an optimal rule that matches the empirical Taylor rule.     

North-South trade and directed technical change

In a world where poor countries provide weak protection for intellectual property rights (IPRs), market integration shifts technical change in favor of rich nations. Through this channel, free-trade may amplify international wage differences. At the same time, integration with countries where IPRs are weakly protected can slow down the world growth rate. An important implication of these results is that protection of intellectual property is most beneficial in open countries. This prediction, which is novel in the literature, is consistent with evidence from a panel of 53 countries observed in the years 1965-1990. The paper also provides empirical support for the mechanism linking North-South trade to the direction of technical change: an increase in import penetration from low-wage, low-IPRs countries is followed by a sharp fall in R&D investment in a panel of US manufacturing sectors.