Three essays in corporate strategy

Abstract

In the first chapter of this thesis, I study the optimal contract in double moral hazard problems when contracting parties are risk-neutral and the agent faces limited liability. In addition, the contract is required to be flexible so as to accommodate heterogeneous contracting scenarios. I show a simple share-or-nothing with bonus (SonBo for short) contract is optimal, which implements the second-best outcome. SonBo gives the principal one degree of freedom in choosing the value of one parameter among three instruments: an output threshold, a bonus and the agent's share of the output. The freedom gives SonBo a flexibility to meet different contract requirements without compromising its performance. The sufficient and necessary condition for the existence of SonBo is established. Any contract implementing the second-best must satisfy this condition, so no other contracts can do better than SonBo. I also discuss characteristics that make a party suitable to be the principal rather than the agent.

In the second chapter of this thesis, I show that when facing an uncertain demand, a company may intentionally choose a technology that makes it harder to reposition its product in the future, even though a more flexible technology is available at no additional cost. Rigidity can be valuable because it commits a firm to competing more aggressively, which forces its rival to stay away from favorable positions in the product space. I demonstrate that rigidity is valuable only when the rival is using a flexible technology, and the value increases with demand uncertainty. Interestingly, rigidity softens price competition in some demand realizations such that, on expected terms, it can benefit not only the rigid firm itself but also its flexible rival, leading to a win-win outcome. Even the consumers may gain from equilibrium rigidity because, in some other demand realizations, it intensifies price competition and results in positions that better match consumers' tastes.

In the third chapter of this thesis, I study how incomplete information affects firms' merger incentives and the likelihood of merger waves. I find mergers can become strategic complements under incomplete information even if they are strategic substitutes under complete information. A low demand realization tends to increase firms' merger incentives. Compared with the complete information scenario, the likelihood of merger waves under incomplete information can be higher or lower, depending on the realized demand size and merger cost.