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Merger negotiations and ex-post regret


Gärtner, Dennis L; Schmutzler, Armin (2009). Merger negotiations and ex-post regret. Journal of Economic Theory, 144(4):1636-1664.

Abstract

We consider a setting in which two potential merger partners each possess private information pertaining
both to the profitability of the merged entity and to stand-alone profits, and we investigate the extent to
which this private information makes ex-post regret an unavoidable phenomenon in merger negotiations.
To this end, we consider ex-post incentive compatible mechanisms, which use both players’ reports to determine whether or not a merger will take place and what each player will earn in each case. When the outside option of at least one player is known, the efficient merger decision can be implemented by such a mechanism under plausible budget-balance requirements. When neither outside option is known, we show that the potential for regret-free implementation is much more limited, unless the budget balance condition is relaxed to permit money-burning in the case of false reports.

Abstract

We consider a setting in which two potential merger partners each possess private information pertaining
both to the profitability of the merged entity and to stand-alone profits, and we investigate the extent to
which this private information makes ex-post regret an unavoidable phenomenon in merger negotiations.
To this end, we consider ex-post incentive compatible mechanisms, which use both players’ reports to determine whether or not a merger will take place and what each player will earn in each case. When the outside option of at least one player is known, the efficient merger decision can be implemented by such a mechanism under plausible budget-balance requirements. When neither outside option is known, we show that the potential for regret-free implementation is much more limited, unless the budget balance condition is relaxed to permit money-burning in the case of false reports.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Economics
Dewey Decimal Classification:330 Economics
Language:English
Date:July 2009
Deposited On:14 Dec 2009 14:04
Last Modified:05 Apr 2016 13:32
Publisher:Elsevier
ISSN:0022-0531
Publisher DOI:https://doi.org/10.1016/j.jet.2009.01.002

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