Optimal Cross Holding with Externalities and Strategic Interactions

Matthew J. Clayton, Bjørn N. Jørgensen

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Abstrakt

We analyze a two period setting where firms first choose equity positions in each other and second engage in operating activities that cause externalities. Firms facing positive externalities optimally choose long equity positions to increase their profits. Firms facing negative externalities encounter a prisoners' dilemma, where each firm optimally chooses short positions in the first period, committing to a more aggressive operating stance that results in lower profits. In contrast to the prior literature, regulation restricting cross holdings reduces consumer surplus and economic welfare when the number of firms is fixed. However, such regulation can increase entry, improving net welfare.
OriginalsprogEngelsk
TidsskriftThe Journal of Business
Vol/bind78
Udgave nummer4
Sider (fra-til)1505-1522
Antal sider18
ISSN0021-9398
DOI
StatusUdgivet - 2005

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