Procurement favouritism and technology adoption

It is well known that the design of cost minimizing procurement rules for the selection of a contractor among distinct technological groups requires the favouritism of inefficient firms. In this paper, I show that, if technology adoption is non-contractible, these policies will also provide optimal incentives for the inefficient firms to adopt more efficient technologies.     

Nonprofits and public good provision: A contest based on compromises

Two competing nonprofits with ideologically distinct missions compete for donor funding to provide an indivisible public good in a population with heterogeneous preferences. This paper examines the extent to which (average) public values are undermined and nonprofits’ ideology compromised in a contractual game in which the right to provide the public good is the outcome of competition between nonprofits. We also scrutinize the roles of (i) cooperative versus competitive contracting, (ii) multiple public goods, (iii) enforceability of actions and (iv) observability of nonprofit costs in determining the equilibrium terms of the contract. In each case, the intensity of the ideological divide between the donor and the nonprofits jointly impact the degree to which compromises are made in terms of both the public's and nonprofit's missions, and the ability on the part of the donor to reap double (cost-saving and strategic) financial gains.     

Managerial incentives and collusive behavior

I characterize the effects of empirically observed managerial incentives on long-run oligopolistic competition. When managers have a preference for smooth time-paths of profits - as revealed by the empirical literature on “income smoothing” - manager-led firms can sustain collusive agreements at lower discount factors. Capped bonus plans and incumbency rents with termination threats make collusion supportable at any discount factor, independent of contracts' duration. When managers have these preferences/incentives and demand fluctuates, “price wars during booms” need not occur: the most collusive price may then be pro-cyclical.     

Subsidizing (and taxing) business procurement

This paper studies the effect of a subsidy (or tax) on a market where a downstream manufacturer uses a competitive tender to procure inputs from upstream suppliers. Subsidizing input production can result in input price decreases that are greater than the effective decrease in marginal costs. That is, overshifting occurs. When the size of the subsidy is not too large, the downstream firm can enjoy an increase in profits greater than the government expenditure on the subsidy. A relatively weak sufficient condition for these results to hold is that suppliers earn a positive profit margin on the marginal unit sold, before taking into account any subsidy payment. Stronger sufficient conditions, tailored to each result, are provided.     

Undesirable competition

We show that the entry of private profit-maximising firms makes the consumers worse off compared to having a nationalised monopoly. Such entry increases the nationalised firm’s profit, industry profit, and social welfare, at the expense of the consumers. Our result is important for competition policy.     

An Assessment of Bank Merger Success in Germany

Abstract. German banks have experienced a merger wave since the early 1990s. However, the success of bank mergers remains a continuous matter of debate.This paper suggests a taxonomy to evaluate post-merger performance on the basis of cost and profit efficiency (CE and PE). I identify successful mergers as those that fulfill simultaneously two criteria. First, merged institutes must exhibit efficiency levels above the average of non-merging banks. Second, banks must exhibit efficiency changes between merger and evaluation year above efficiency changes of non-merging banks. I assess the post-merger performance up to 11 years after the mergers and relate it to the transfer of skills, the adequacy to merge distressed banks and the role of geographical distance. Roughly every second merger is a success in terms of either CE or PE. The margin of success in terms of CE is narrow, as efficiency differentials between merging and non-merging banks are around 1 and 2 percentage points. PE performance is slightly larger. More importantly, mergers boost in particular the change in PE, thus indicating persistent improvements of merging banks to improve the ability to generate profits.     

Progressive taxation,tax exemption,and corporate liquidation policy

This paper develops a real options model of a firm that operates in continuous time with an infinite horizon. The firm receives stochastic profit flows that are subject to progressive taxation. Tax progression arises from an exogenously given tax exemption threshold that makes the average tax rate increase with the tax base. The firm possesses an option to liquidate its operation, which is optimally exercised when the firm's profit flow reaches an endogenously determined threshold level (the liquidation trigger) from above. We show that the firm's liquidation trigger under progressive taxation increases with either a reduction in the tax exemption threshold or an increase in the corporate income tax rate. Corporate income taxes are thus not neutral when tax schedules are progressive.     

THE DECISION TO HIRE MANAGERS IN MIXED MARKETS UNDER BERTRAND COMPETITION*

This paper analyses the decisions of firms as to whether or not to hire managers when there is a public firm competing with a private firm in the product market. It is shown that under Bertrand competition with heterogeneous goods both firms hire managers. This is in contrast with the result obtained under Cournot competition, where only the private firm hires a manager. Moreover, welfare is lower if both firms hire managers than if neither firm does. In contrast, under Cournot competition welfare is greater if both firms hire managers.     

STRATEGIC BUDGET CONSTRAINTS IN A UNIONIZED MIXED OLIGOPOLY

This paper considers the budget‐constraint problem where the government decides whether or not to impose a budget constraint on the public firm, assuming the public firm is less efficient than private firms. We find that imposing budget constraints on the public firm is the preferred choice because of the welfare‐improving effect. Our model suggests that the wage levels of the public firm can be lower or higher than those of private firms depending upon the degree of inefficiency. These results differ from Ishida and Matsushima's findings that in a unionized mixed duopoly, tight budget constraints can enhance social welfare when the public firm is as efficient as private firms.     

Mutual supervision in preshipment inspection programs

Preshipment inspection (PSI) programmes are implemented in many developing countries to assist governments in the collection of revenue at their borders. These programs consist of the delegation of the inspection of imports to a private firm. To study these PSI programmes, we develop a hierarchical agency model in which the government authority can rely on two supervisors, namely the private inspection firm and the customs administration, to control importers' declarations. The government's optimal contract is fully characterized. We devote some attention to the inspection policy and its comparative statics properties. In particular, we identify the situations in which PSI programmes are revenue enhancing. We also discuss the reconciliation policy, i.e. what to do in case of conflicting inspection reports by the inspection firm and the customs administration. In the optimal mechanism, mutual supervision between the inspection firm and the customs administration is used to provide adequate incentives to all parties.     

Optimal collusion-proof auctions

We study an optimal collusion-proof auction in an environment where subsets of bidders may collude not just on their bids but also on their participation. Despite their ability to collude on participation, informational asymmetry facing the potential colluders can be exploited significantly to weaken their collusive power. The second-best auction — i.e., the optimal auction in a collusion-free environment — can be made collusion-proof, if at least one bidder is not collusive, or there are multiple bidding cartels, or the second-best outcome involves a non-trivial probability of the object not being sold. Regardless, optimal collusion-proof auction prescribes non-trivial exclusion of collusive bidders, i.e., a refusal to sell to any collusive bidder with positive probability.     

Competing auctions with endogenous quantities

Two sellers decide on their discrete supply of a homogenous good. There is a finite number of buyers with unit demand and privately known valuations. In the first model, there is a centralized market place where a uniform auction takes place. In the second, there are two distinct auction sites, each with one seller, and buyers decide where to bid. Using the theory of potential games, we show that in the one-site auction model there is always an equilibrium in pure-strategies. In contrast, if the distribution of buyers values has an increasing failure rate, and if the marginal cost of production is relatively low, there is no pure-strategy equilibrium where both sellers make positive profits in the competing sites model. We also identify conditions under which an equilibrium with a unique active site exists. We deal with the finite and discrete models by using several results about order statistics developed by Richard Barlow and Frank Proschan [R. Barlow, F. Proschan, Mathematical Theory of Reliability, Wiley, New York, 1965; R. Barlow, F. Proschan, Inequalities for linear combinations of order statistics from restricted families, Ann. Math. Statist. 37 (1966) 1593-1601; R. Barlow, F. Proschan, Statistical Theory of Reliability and Life Testing, McArdle Press, Silver Spring, 1975].     

Privatization when the public firm is as efficient as private firms

The literature on mixed oligopoly shows that when production costs are quadratic the public firm is privatized if the competition in the product market is high enough. Similarly, when the public firm is less efficient than private firms and the marginal costs of production are constant, the government privatizes the public firm if its efficiency is low enough. In this paper we analyze this issue assuming that the public firm maximizes the weighted sum of consumer surplus, private profit and the profit of the public firm. If all firms have the same marginal cost of production we obtain that for some value of parameters the government does not privatize the public firm regardless of how many private firms are competing in the product market. We also obtain that the consumer surplus can be lower in the mixed oligopoly than in the private oligopoly.     

Unions, government's preference, and privatization

By introducing the government's preference for tax revenues into the theoretical framework of unionized mixed oligopolies, this study investigates the efficiency of privatization. The results are twofold. First, regardless of the government's preference for tax revenues and the number of private firms, the government and the public firm do not always have an incentive to privatize the public firm even if the government places lesser emphasis on the tax revenues than on social welfare. Second, social welfare increases with an increased number of private firms regardless of the government's preference for tax revenues and decreases with the government's preference for tax revenues regardless of the number of private firms. Hence, the government can use tax more efficiently as a commitment device to control the union's wage demand so as to maintain lower wage level under unionized mixed oligopoly.