Predatory Governance

Dalida Kadyrzhanova ()

No 421, Computing in Economics and Finance 2005 from Society for Computational Economics

Abstract: This paper argues that imperfect corporate control is a determinant of market structure. We integrate a widely accepted version of the separation of ownership and control -- Jensen's (1986) 'empire-building' hypothesis -- into a dynamic oligopoly model. Our main observation is that, due to product market competition, shareholders face an endogenous opportunity cost of governance. We derive shareholders' optimal governance choices and show analytically that governance has a first-order effect on firms' dynamic incentives and leads to increasing dominance and predation. Through numerical simulations we demonstrate that imperfect corporate control has a sizable adverse impact on market structure and consumer welfare. It results in low turnover, high concentration, persistently monopolized markets, and low industry-wide investment. As a consequence, consumer welfare is significantly - up to thirty percent - lower than in otherwise identical industries with full corporate control. These results suggest a role for public policy toward corporate governance as an effective pro-competitive tool.

Keywords: Managerial Preferences; Optimal Governance; Dynamic Oligopoly; Markov Perfect Equilibrium (search for similar items in EconPapers)
JEL-codes: L1 G34 L2 C63 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com and nep-fin
Date: 2005-11-11
View list of references

Downloads: (external link)
http://repec.org/sce2005/up.15357.1107233869.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Access Statistics for this paper

More papers in Computing in Economics and Finance 2005 from Society for Computational Economics
Contact information at EDIRC.
Series data maintained by Christopher F. Baum ().