A Theory of Predation Based on Agency Problems in Financial Contracting

Transcription

1 A Theory of Predaton Based on Agency Problems n Fnancal Contractng Patrck Bolton, Davd S. Scharfsten The Amercan Economc evew, Volume 80, Issue Mar., 990, Presented by Tatana Levna

2 The Borrower-Lender elatonshp When a bank grants a loan to a borrower, both partes typcally sgn a contract Bolton and Scharfsten study a repeated borrower-lender relatonshp n whch the threat of termnaton by the lender provdes ncentves for the borrower to repay the loan. Ths termnaton threat, however, s costly n a compettve envronment. Theory of Bankng and Fnancal Intermedaton

3 Contractng Wthout Predaton Consder frm B and nvestor I 0 Perod 0 I: take-t-or-leave-t contract B: accepts / refuses Theory of Bankng and Fnancal Intermedaton 3

4 Contractng Wthout Predaton Perod B: gross proft wth prob. θ or - θ > cost F < F θ θ > F Theory of Bankng and Fnancal Intermedaton 4

5 Contractng Wthout Predaton Perod I: receves f manager reports proft mt probablty [ ] 0, gves the frm F to fund second-perod producton Perod B: reports proft I: receves Theory of Bankng and Fnancal Intermedaton 5

6 Theory of Bankng and Fnancal Intermedaton 6 Optmal Contract subject to ncentve compatblty lmted lablty 3 ndvdual ratonalty [ ] [ ] max },, { F F F θ θ [ ] θ [ ] 0 θ

7 Optmal Contract POPOSITION : The nvestor nvests at date 0, f and only f F < / θ postve proft condton In ths case, * = * = 0 * = * = the frm operates n the second perod f and only f ts frst-perod profts are Theory of Bankng and Fnancal Intermedaton 7

8 Predaton and the Optmal Contract Frms A and B compete n perods and Perod 0 I: contract B: accepts / refuses A: observe the contract / cannot observe Perod A: preys for a cost c>0: θ -> µ / doesn t prey B: or I:, ß Perod B: exts / remans m d A: monopolst -> / I: Theory of Bankng and Fnancal Intermedaton 8

9 Observable Contracts no-predaton constrant : m d µ θ POPOSITION : Frm B enters f and only f F max θ, µ F postve proft condton If B enters, and θ µ the optmal contract deters predaton. In ths case * * = 0 = * * = = If frm B enters and θ < µ, the contract s as gven n Proposton and frm A preys. Theory of Bankng and Fnancal Intermedaton 9 c or { } 0 >

10 Unobservable Contracts When contracts are unobservable, t s as f the nvestor and the predator play a smultaneous move game. POPOSITION 3: Frm B enters f and only f F µ F > 0 postve proft condton If the frm enters, the contract s as gven n Proposton and frm A preys. Theory of Bankng and Fnancal Intermedaton 0

11 Concluson The central argument of ths paper s that agency problems n fnancal contractng can gve rse to ratonal predaton. The fnancal contract that mnmzes agency problems also maxmzes rvals ncentves to prey. Theory of Bankng and Fnancal Intermedaton

12 Appendx Postve proft condton n Proposton : Gven the optmal contract, the nvestor expected profts are: θ F θ F F = F θ F > 0 Thus F < / θ Theory of Bankng and Fnancal Intermedaton

13 Appendx Proposton : there s an ex post neffcency; the frm s lqudated when frst-perod proft s even though > F and t s effcent to operate. Predaton can nduce lqudaton and ext because t adversely affects the agency relatonshp between the rval s nvestors and manager. Ths may force the frm to rely more on nternal sources of captal than on external ones. But, ths reduces the extent to whch outsde nvestors montor the frm and ncreases the possblty of manageral slack. Theory of Bankng and Fnancal Intermedaton 3