Sugato Bhattacharyya

Double-Sided Moral Hazard and the Nature of Share Contracts

Contractual arrangements involving revenue/profit sharing are often based on fairly simple, often linear, rules. In addition, in many contexts these contracts are not finely adjusted to the particular circumstances of individual agents or markets, nor do they vary over time to the extent current theories based on optimal contracting suggest they should. We develop a simple model of such revenue- or profit-sharing arrangements based on double-sided moral hazard and show that this model can account for many of these stylized facts. More specifically, the model shows that linear contracts can be optimal and that benefits from customizing terms can, in some cases, be quite limited, if not zero.

Choosing the method of sale: A clinical study of Conrail

This paper analyzes the sale of Conrail (Consolidated Rail Corporation) and finds three problems: first, a contingent claim gave the seller (the U.S. Government) conflicting objectives; second, bidders in the auction valued Conrail differently and thus did not compete effectively; and third, Conrails management had an information advantage over the seller and outside bidders. These three factors can be present in any corporate divestiture and will tend to decrease the sellers revenue. We discuss how different methods of sale (e.g., two-stage auctions and parallel secret negotiations) will counteract these problems to varying degrees, although we find no single ‘best’ method.

The Resolution of Bankruptcy by Auction: Allocating the Residual Right of Design ??

Abstract In this paper, we examine the value of the right to choose the method of sale of corporate assets. We show that this right is valuable, and that its value comes from recognizing conflicting incentives of claimants at the time of sale. As with risky projects, senior and junior claimants are shown to have distinct preferences on a set of common auction procedures. They also differ on the issue of allocation of resources towards attracting bidders for the auction. As a consequence, the optimal allocation of the design right must depend on circumstances prevailing at the time of the sale. While, in general, selling the firm by auction does not guarantee the use of optimal selling arrangements, a suitable allocation of design rights may help mitigate inefficiency problems significantly.

Ex ante versus interim rationality and the existence of bubbles

SummaryTirole (1982) is commonly interpreted as proving that bubbles are impossible with finitely many rational traders with common priors. We study a simple variation of his model in which bubbles can occur, even though traders have common priors and common knowledge that the asset has no fundamental value. In equilibrium, agents purchase the asset at successively higher prices until the bubble “bursts” and no subsequent trade occurs. Each traders initial wealth determines the last date at which he could possibly trade. The date at which the bubble bursts is a function of these finite “truncation dates” for the individual traders. Since initial wealth is private information, no trader knows when the bubble will burst. There are two key differences between our model and Tiroles which enable us to construct equilibrium bubbles this way. First, Tirole requires ex ante optimality, while we only require every traders strategy to be optimal conditional on his information — i.e., interim optimal. As we argue in the text, this would seem to be the relevant definition of optimality. Second, Tirole considers competitive equilibria, while we analyze a simple bargaining game.

Clinical paperChoosing the method of sale: A clinical study of Conrail☆

This paper analyzes the sale of Conrail (Consolidated Rail Corporation) and finds three problems: first, a contingent claim gave the seller (the U.S. Government) conflicting objectives; second, bidders in the auction valued Conrail differently and thus did not compete effectively; and third, Conrails management had an information advantage over the seller and outside bidders. These three factors can be present in any corporate divestiture and will tend to decrease the sellers revenue. We discuss how different methods of sale (e.g., two-stage auctions and parallel secret negotiations) will counteract these problems to varying degrees, although we find no single ‘best’ method.