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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: C63 G34 L1 L2 (search for similar items in EconPapers)
Date: 2005-11-11
New Economics Papers: this item is included in nep-com and nep-fin
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