Specificity revisited: The role of cross-investments

Previous analysis has shown that traders may opt for specific technologies with no joint productivity advantage as a way to commit themselves to trading jointly, but only when long-term contracting is infeasible. This paper proves that speciÞcity can also be optimal (by relaxing the budget-balance constraint) in settings with long-term contracting. Traders will opt for specificity when one trader makes a cross-investment and either (1) this cross-investment has a direct externality on the other trader, (2) both parties invest, or (3) private information is present. The specificity (e.g. from non- salvageable investments, specific assets and technologies, narrow business strategies, and exclusivity restrictions) is equally effective regardless of which trader's alternative trade payoff is reduced. Specificity supports long-term contracts in a broad range of settings - both with and without renegotiation. The theory also offers a novel perspective on franchising and vertical integration.Specificity, hostages long-term contracting, cross-investments, budget-balance, renegotiation

The Value of Flexibility in the Italian Water Service Sector: A Real Option Analysis

We analyze the optimal investment strategy of a monopolist which has subscribed a concession contract to provide a public utility, i.e. water service. We present a strategic model in which a monopolist chooses both the timing of the investment and the capacity. We focus not only on the value of the immediate investment, but rather on the value of the investment opportunity. We then extend the model to two interdependent projects, where investing in the first project provides the opportunity to acquire the benefits of the new investment by making a new outlay. We show that flexibility to defer an investment may generate, ceteris paribus, additional profits which may induce positive effects in terms of policy and consumers surplus.Irreversible investment, Flexibility to defer, Capacity expansion choice

“Financial alchemy” or a zero sum game? Real estate finance, securitisation and the UK property market

Following the US model, the UK has seen considerable innovation in the funding, finance and procurement of real estate in the last decade. In the growing CMBS market asset backed securitisations have included $2.25billion secured on the Broadgate office development and issues secured on Canary Wharf and the Trafford Centre regional mall. Major occupiers (retailer Sainsbury’s, retail bank Abbey National) have engaged in innovative sale & leaseback and outsourcing schemes. Strong claims are made concerning the benefits of such schemes – e.g. British Land were reported to have reduced their weighted cost of debt by 150bp as a result of the Broadgate issue. The paper reports preliminary findings from a project funded by the Corporation of London and the RICS Research Foundation examining a number of innovative schemes to identify, within a formal finance framework, sources of added value and hidden costs. The analysis indicates that many of the gains claimed conceal costs – in terms of market value of debt or flexibility of management – while others result from unusual firm or market conditions (for example utilising the UK long lease and the unusual shape of the yield curve). Nonetheless, there are real gains resulting from the innovations, reflecting arbitrage and institutional constraints in the direct (private) real estate marke

Essays on Price Competition and Firm Strategies in Oligopolies

This dissertation is part of the effort to contribute to our understanding of Price Competition and Firm Strategies in oligopolistic markets with certain characteristics. It comprises of three chapters. Chapter 1 provides the introduction and background of the research and a brief summary of results. Chapter 2: Firms practice poaching of their rival's customers in markets where they are able to identify between their own customers and those of the rivals. This practice results in inefficiently high switching. In some of these markets firms also use strategies that make poaching by rival firms harder. In this chapter I explore the practice of firms requiring customers to sign contracts that are of pre-specified duration specifying early termination charges (or breach penalty). If contract with breach penalty is available, firms find it privately optimal to use it. However when all firms use it they are worse off and results in lower than efficient switching. Consumers may be better off or worse off. Chapter 3: In this chapter we examine the pricing decision of a typical firm that sells more than one product in markets where products are strategic complements and the firms have some market power. We show that such a firm internalizes the strategic complementarities when optimally choosing its prices leading to higher prices. We then empirically test and confirm in the US wholesale market for unbranded gasoline that a major refiner charges a higher wholesale price for unbranded gasoline in cities where it also sells its brand gasoline at retail compared to cities where it does not. Furthermore, in the cities where the refiner has brand presence at retail we find empirical evidence that its wholesale price of unbranded gasoline is higher the higher is the market share of its brand in retail

Strategic decisions of multinational enterprises: foreign direct investment and technology

This thesis consists of three self-contained chapters concerning the determination of 'equilibrium industrial structures' in 'international oligopolies'. In each model presented in the thesis rival oligopolists in the industry concerned choose their 'corporate structures' and then compete to serve the national product markets (either via local production following foreign direct investment (FDI) or via imports). Our analyses are united by the general types of 'corporate structure' choices considered and by the broad features of 'industrial structure' that are endogenously determined in equilibrium. We emphasise, the roles played by the following three phenomena in shaping 'equilibrium industrial structures': the distinction between greenfield-FDI ('greenfield investment') and acquisition-FDI (cross-border mergers and acquisitions); R&D investments and technology flows ('technology transfer') both within and between firms; and the potential entry into the industry of "outside' firms, and incumbent firms' strategic reactions to the entry threat. The distinction between greenfield-FDI and acquisition-FDI is both empirically and theoretically important: whereas greenfield-FDI adds an extra plant to the host country, acquisition-FDI changes only the ownership pattern of existing plants. Despite this, previous game-theoretic models of equilibrium FDI flows have concentrated exclusively on one type of FDL Therefore, allowing theform of FDI to be endogenously selected as part of the 'equilibrium industrial structure' is both a novel and an interesting feature of our analysis. It also allows us to investigate the differential relationships between the two types of FDI and industry R&D spending (and therefore to test a popular 'failing firm' defence of inward acquisition-FDI: that it fosters 'technological development', the benefits of which outweigh the welfare costs of increased 'concentration'). A further novel feature of our analysis is the potential for (de novo) entry into the industry (at a global level): previous work assumed blockaded entry. We show that a credible entry threat by 'outside' firms has significant consequences for 'equilibrium industrial structure'. At a general level, the results derived in this thesis provide a perspective on the relationship between MNEs' behaviour and industrial structure in 'globalized' industries that contrasts with that offered by Dunning's 'OLI paradigm'.I t is also hoped that this thesis will be viewed as having made a useful contribution to unpicking the aggregation, which frequently occurs in public debate, of greenfield-FDI and acquisition-FDI into a (supposedly homogeneous) flow of 'inward investment'

Legislative Threats

The Article presents a theory of legislative threats that pierces the fundamental concept of the legal system as a regulatory institution and more generally as a mechanism of social governance. It examines ten case studies that demonstrate the use of legislative threats in diverse areas of law and social policy. Conceptually, legislative threats encompass a variety of threats that legislators exert on firms and financial institutions, organizations and institutional shareholders, professions and industrial sectors, universities and public institutions, federal agencies, and possibly even U.S. states, according to which legislators will exercise their legislative mandate and enact adverse legislation in order to regulate the conduct or condition in question, unless the recipients of the threat alter their behavior so as to bring it in line with the legislators’ demands (Implicit in the threat is the inverse promise that the legislators will forgo the threatened legislation if, and only if the recipients of the threat comply with the demands). The Article also offers an analytic taxonomy of threats that includes explicit, implicit, and anticipatory legislative threats. Using non-cooperative game-theory, the Article models the strategic interaction between legislators and threat-recipients and generates predictions concerning the inducement effect of legislative threats on behavior. Specifically, the analysis considers conditions that may render threats credible, including (i) legislators’ pre-game commitment; (ii) legislators’ reputation; and (iii) legislators’ emotional motivations. The analysis also examines (i) the effects of the probabilistic nature of legislative threats; (ii) the effects of imperfect and asymmetric information on the threat’s inducement effects; (iii) the effects of legislative threats on the properties of regulatory bargaining in the shadow of the threat (e.g., the magnitude of transaction costs, information revelation, and degree of contractual incompleteness); and (iv) the effects of strategic interaction within homogenous and heterogeneous as well as organized and unorganized groups on threat-induced compliance. The Article considers the effects of legislative threats on (i) social control efficacy and (ii) democratic and constitutional legitimacy. To that end, the analysis highlights functional and institutional considerations pertaining, respectively, to the comparative capacity of legislative threats to effectively control behavior in an increasingly-complex and information-intensive social reality; and to various political, constitutional, and democratic implications arising from the use of legislative threats. Functional considerations include: (i) the asymmetric information of social planners and its effects on social control; (ii) the superiority of threat-induced self-regulation of conduct compared with “top down” regulation of conduct; (iii) the capacity of threat-induced self-regulation to accommodate rapidly-changing demands of social control; and (iv) the effects of threat-induced self-regulation on reducing the costs of law enforcement. In this respect, the analysis advances the following claim: legislative threats can be viewed as a spontaneous response to the institutionally-handicapped position of lawmakers and to the limits of the law in effectively controlling social activities; to that end, legislative threats are designed to reduce information and transaction costs of policy-making and regulatory bargaining. Institutional considerations encompass ways in which the use of legislative threats enables legislators and regulators to evade procedural safeguards, institutional constraints, and substantive controls designed to limit the power to make law and effect policy changes. These considerations are based upon the following observations: (i) using legislative threats, legislators opt-out of the “rules of the game,” disenfranchise fellow legislators, and are therefore able to effect policy changes notwithstanding a possible lack of majoritarian support; (ii) legislative threats disenfranchise the executive branch by preventing a possible presidential veto and by sidestepping the government’s role in law enforcement; (iii) legislative threats disenfranchise the states by redrawing the federal-state allocation of regulatory powers; (iv) legislative threats bypass constitutional safeguards by evading judicial review of statutes; and (v) legislative threats disenfranchise the judiciary by circumventing precedent-setting interpretation of statutes. The Article argues that notwithstanding the superior functional capacity of legislative threats to control behavior in an increasingly-complex and information-intensive society, the institutionally-unregulated and politically-unaccountable use of implicit and explicit threats poses formidable normative challenges for the most treasured attributes of American constitutional democracy. On balance, it seems that even though the benefits of legislative threats may exceed their short-term cost (thus becoming efficient in the short-term), in the long-term the reverse is true, thus suggesting that the best domain of legislative threats consists, in fact, of an empty set. For, any increase in individual well-being and aggregate social welfare—due to the improved efficacy of social control—is inevitably outweighed by a higher commensurate decrease in well-being and social welfare, reflecting in turn the toll of violating constitutional and democratic principles; the negative impact on societal stability and the disincentive on private investment; and the consequential decline in economic growth. In turn, the discussion develops a social control scheme that is rooted in the province of legislation and is designed to ensure the socially-optimal trade-off between regulatory efficacy and the toll on democratic accountability, namely: an outcome-oriented or risk-focused, deferred-implementation, contingent sunset legislation. Lastly, the Article argues that the exponential increase in the complexity of activities and the rapid changes in behavior across all social domains are two major sources of growth-driven social instability. Paradoxically, absent effective social control, the processes that drive well-developed market economies towards economic growth and social progress, may ultimately propel their economic decline, increase social instability, and lead to their gradual societal deterioration. Thus, the more advanced a society becomes the more demanding is the lawmakers’ role. Viewed from this perspective, the emergence of legislative threats—though institutionally illegitimate and socially unwarranted—demonstrates the limits of law and the severe limitations of lawmakers. Moreover, they underscore the growing incapacity of the legal system to deliver its pre-eminent promise: to maintain ordered liberty and to promote sound public policies. Viewed from an ever broader perspective, the widespread use of legislative threats demonstrates an increasing tendency towards (what I label) a second-order social control system, where legislators establish second-order rules designed to create the incentives necessary to induce entities and groups to adopt socially-desired rules of conduct. Inevitably, the trend toward second-order social control diminishes the traditionally-extensive role of the regulatory state, but increases the power of groups that, in shaping their regulatory environment, practically turn into islands of self-regulation