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Predation Due to Bargaining Power Difference in Financial Contracting

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  • Chan, Kwok Ho
  • Lu, Zhou
  • Fung, Ka Wai Terence

Abstract

Previous literature presented a predation model based on agency problems in financial contracting. In that model, predation reduced prey’s cash flow through breaking the relationship between the prey and its investors as the prey is financially constrained. This paper presents a different model in which both the predator and the prey are financially constrained and in need of external funding. The only dissimilarity between the predator and the prey is their corresponding level of bargaining power in financial contracting over their respective investors. The asymmetry of bargaining power is the unique source of predatory behavior. Financial contract between firm with less bargaining power (prey) and its investor can deter predation if the predator cannot renegotiate the contract with its own investor. If renegotiation is available for the predator, no financial contract can successfully deter predation.

Suggested Citation

  • Chan, Kwok Ho & Lu, Zhou & Fung, Ka Wai Terence, 2013. "Predation Due to Bargaining Power Difference in Financial Contracting," MPRA Paper 52873, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:52873
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    References listed on IDEAS

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    1. Drew Fudenberg & Jean Tirole, 1986. "A "Signal-Jamming" Theory of Predation," RAND Journal of Economics, The RAND Corporation, vol. 17(3), pages 366-376, Autumn.
    2. Fernandez-Ruiz, Jorge, 2004. "Predation due to adverse selection in financial markets," International Journal of Industrial Organization, Elsevier, vol. 22(5), pages 715-733, May.
    3. Snyder, Christopher M, 1996. "Negotiation and Renegotiation of Optimal Financial Contracts under the Threat of Predation," Journal of Industrial Economics, Wiley Blackwell, vol. 44(3), pages 325-343, September.
    4. Douglas Gale & Martin Hellwig, 1985. "Incentive-Compatible Debt Contracts: The One-Period Problem," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 52(4), pages 647-663.
    5. Jean-Pierre Benoit, 1984. "Financially Constrained Entry in a Game with Incomplete Information," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 490-499, Winter.
    6. Drew Fudenberg & Jean Tirole, 1985. "Predation Without Reputation," Working papers 377, Massachusetts Institute of Technology (MIT), Department of Economics.
    7. Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 51(3), pages 393-414.
    8. Michel Poitevin, 1989. "Financial Signalling and the "Deep-Pocket" Argument," RAND Journal of Economics, The RAND Corporation, vol. 20(1), pages 26-40, Spring.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Predation; Long-purse; Signal-jamming; Financial Contracts; Bargaining Power;
    All these keywords.

    JEL classification:

    • D87 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Neuroeconomics
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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