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The Regulation of Predatory Firms
Author(s) -
FaureGrimaud Antoine
Publication year - 1997
Publication title -
journal of economics and management strategy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.672
H-Index - 68
eISSN - 1530-9134
pISSN - 1058-6407
DOI - 10.1111/j.1430-9134.1997.jems0697_425.x
Subject(s) - incentive , economic rent , predation , competitor analysis , regulator , private information retrieval , business , microeconomics , economics , biology , ecology , biochemistry , statistics , mathematics , marketing , gene
This article investigates the issue of predation by a regulated firm. Since it has private information, a regulated firm obtains higher rents in case of successful predation: the fewer the competitors, the higher the marginal social value of the regulated firm's effort and the higher the informational rents. Both principals (the investor of a “target” firm and the regulator) have to provide some incentives to prevent predation: the investor has to reduce the sensitivity of refinancing to predation; the regulator has to lower the gain of successful predation. It is shown that there is a trade‐off between the power of the regulatory incentive scheme and the regulated firm's incentives to prey. In addition, as deterring predation is costly, the investor and the regulator compete when offering contracts: each wants to free‐ride on the other. Hence, predation may occur in equilibrium although it makes both principals worse off.