Just Enough or All: Selling a Firm

Mehmet Ekmekci (), Nenad Kos and Rakesh Vohra

No 470, Working Papers from IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University

Abstract: We consider the problem of selling a firm to a single buyer. The magnitude of the post-sale cash flow rights (v) as well as the benefits of control (b) are the buyer’s private information. In contrast to research that assumes the private information of the buyer is one-dimensional, the optimal mechanism is a menu of tuples of cashequity mixtures. We provide sufficient conditions on the joint distribution of v and b such that the optimal mechanism takes one of the following forms: i) a take-it or leave-it offer for the smallest fraction of the company that facilitates the transfer of control, or ii) a take-it or leave-it offer for all the shares of the company. We also identify a sufficient condition for the seller to extract the full value, v, per share so that the buyer earns information rents only on the private benefits of control. JEL Code: D82, D86. Keywords: Multidimensional mechanism design, negotiated block trades, private benefits, privatization, takeovers, bilateral trade, asymmetric information, cashequity offers.

Date: 2013
New Economics Papers: this item is included in nep-bec, nep-cta and nep-mic
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Journal Article: Just Enough or All: Selling a Firm (2016)
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