Giuseppe Lopomo

EFFICIENT MECHANISMS FOR MERGERS AND ACQUISITIONS

We characterize incentive-efficient merger outcomes when payments can be made both in cash and stock. Each firm has private information about both its stand-alone value and a component of the (possibly negative) potential synergies. We study two cases: when transfers can, and cannot, be made contingent on the value of any new firm. When they can, we show that redistributing shares of any nonmerging firm generates information rents and provides necessary and sufficient conditions for the implementability of efficient merger rules. When they cannot, private information undermines efficiency more when it concerns stand-alone values than synergies. Here, acquisitions emerge as optimal mechanisms. Copyright 2007 by the Economics Department Of The University Of Pennsylvania And Osaka University Institute Of Social And Economic Research Association.

Bargaining, Interdependence and the Rationality of Fair Division

We consider two person bargaining games with independent preferences, with and without bilateral incomplete information. We show that, both in the ultimatum game and in the two-stage alternating-offers game, our equilibrium predictions are fully consistent with all robust experimental regularities which falsify the standard game theoretic model: occurrence of disagreements, disadvantageous counteroffers, and outcomes that come close to the equal split of the pie.

Knightian Uncertainty and Moral Hazard

This paper presents a principal-agent model in which the agent has imprecise beliefs. We model this situation formally by assuming the agent[modifier letter apostrophe]s preferences are incomplete as in Bewley (1986) [2]. In this setting, incentives must be robust to Knightian uncertainty. We study the implications of robustness for the form of the resulting optimal contracts. We give conditions under which there is a unique optimal contract, and show that it must have a simple flat payment plus bonus structure. That is, output levels are divided into two sets, and the optimal contract pays the same wage for all output levels in each set. We derive this result for the case in which the agent[modifier letter apostrophe]s utility function is linear and then show it also holds if this utility function has some limited curvature.

Carbon Allowance Auction Design: An Assessment of Options for the United States

Carbon allowance auctions are a component of existing and proposed regional cap-and-trade programs in the United States and are also included in recent proposed bills in the U.S. Congress that would establish a national cap-and-trade program to regulate greenhouse gases (“carbon”). We discuss and evaluate the two leading candidates for auction format: a uniform-price sealed-bid auction and an ascending-bid dynamic auction, either of which could be augmented with a “price collar” to ensure that the price of allowances is neither too high nor too low. We identify the primary trade-offs between these two formats as applied to carbon allowance auctions and suggest additional auction design features that address potential concerns about efficiency losses from collusion and other factors. We conclude that, based on currently available evidence, a uniform-price sealed-bid auction is more appropriate for the sale of carbon allowances than the other leading auction formats, in part because it offers increased robustness to collusion without significant sacrifice of price discovery.

Split-Award Procurement Auctions with Uncertain Scale Economies: Theory and Data

In a number of observed procurements, the buyer has employed an auction format that allows for a split-award outcome. We focus on settings where the range of uncertainty regarding scale economies is large and, depending on cost realizations, the efficient allocations include split-award outcomes as well as sole-source outcomes (one active supplier). We examine the price performance and efficiency properties of split-award auctions under asymmetric information. In equilibrium, both award outcomes can occur--the split-award outcome arises only when it minimizes total costs; sole-source outcomes, however, occur too often from an efficiency viewpoint. Equilibrium bids involve pooling at a common price for the split award, and separation for sole-source awards. We provide conditions under which the buyer and suppliers all benefit from a split-award format relative to a winner-take-all unit auction format. Model predictions are assessed with data on submitted ‘step-ladder’ bid prices for a US defense split-award procurement.

Stairway to Heaven or Highway to Hell: Liquidity, Sweat Equity, and the Uncertain Path to Ownership

A principal contracts optimally with an agent to operate a firm over an infinite time horizon when the agent is liquidity constrained and has access to private information about the sequence of cost realizations. We formulate this mechanism design problem as a recursive dynamic program in which promised utility to the agent is the relevant state variable. By establishing that output distortions and the stringency of liquidity constraints decrease monotonically in promised utility, we are able to interpret the state variable as the agent’s equity in the firm. We establish a bang-bang property of optimal contracts wherein the agent is incentivised only through adjustments to his future utility until achieving a critical level of equity, after which he may be incentivised through cash payments, that is, through instantaneous rents. Thus the incentive scheme resembles what is commonly regarded as a sweat equity contract, with all cash payments net of costs (rents) being back loaded. A critical level of sweat equity occurs when none of the agent’s liquidity constraints bind. At this point, the contract calls for efficient production in all future periods and the agent attains a vested ownership stake in the firm. Finally, properties of the theoretically optimal contract are shown to be similar to features common in real-world work-to-own franchising agreements and venture capital contracts.

The ‘Google effect’ in the FCC’s 700 MHz auction

We describe and interpret bidding behavior in FCC Auction 73 for the C-block licenses. These licenses were initially offered subject to an open platform restriction, which was highly valued by firms such as Google. Google entered bids until its bids reached the C-block reserve price, thereby ensuring that the open platform restriction would be applied to the licenses. Later in the auction, other bidders outbid Google, so Google was able to trigger the open platform restriction without having to purchase any of the licenses.

Multidimensional Mechanism Design: Finite-Dimensional Approximations and Efficient Computation

Multidimensional mechanism design problems have proven difficult to solve by extending techniques from the one-dimensional case. This paper considers mechanism design problems with multidimensional types when the sellers cost function is not separable across buyers. By adapting results obtained by Border [Border, K. 1991. Implementation of reduced form auctions: A geometric approach. Econometrica59 1175--1187], we transform the sellers problem into a representation that only involves “interim” variables and eliminates the dimensionality dependence on the number of buyers. We show that the associated infinite-dimensional optimization problem posed by the theoretical model can be approximated arbitrarily well by a sequence of finite-dimensional linear programming problems. We provide an efficient---i.e., terminating in polynomial time in the problem size---method to compute the separation oracle associated with the Border constraints and incentive compatibility constraints. This implies that our finite-dimensional approximation is solvable in polynomial time. Finally, we illustrate how the numerical solutions of the finite-dimensional approximations can provide insights into the nature of optimal solutions to the infinite-dimensional problem in particular cases.

Carbon Allowance Auction Design: An Assessment of Options for the U.S.

Carbon allowance auctions are a component of existing and proposed regional cap-and-trade programs in the U.S. and are also included in recent bills in the U.S. Congress that would establish a national cap-and-trade program in the U.S. to regulate greenhouse gases (“carbon”). We discuss and evaluate the two leading candidates for the auction format for carbon allowance auctions: a uniform-price sealed-bid auction and an ascending-bid dynamic auction, either of which could be augmented with a “price collar” to ensure that the price of allowances is neither too high nor too low. We identify the primary trade-offs between these auction formats as applied to carbon allowance auctions and suggest auction design choices that address potential concerns about efficiency losses from collusion and other factors. We conclude that a uniform-price sealed-bid auction is more appropriate for the sale of carbon allowances than the other leading choices, in part because it offers increased robustness to collusion without significant sacrifice in terms of price discovery.

Non-Cooperative Entry Deterrence in License Auctions: Dynamic Versus Sealed Bid

We examine the impact of potential entry on incumbent bidding behavior in license auctions, in both dynamic and sealed bid formats. Unlike sealed bid auctions, dynamic auctions reveal information about the identities of potential winners and allow bidders to revise their bids. This helps incumbents to coordinate their entry deterrence efforts. If entry is sufficiently costly for each incumbent, only the dynamic auction has an equilibrium where entry is deterred for sure. Numerical calculations suggest that, regardless of how costly entry is for each incumbent, sealed bid auctions can generate a higher probability of entry as well as a more efficient allocation.