In this paper we study the role of incomplete ex ante contracts for ex post trade. Previous experimental evidence indicates that a contract provides a reference point for entitlements when the terms are negotiated in a competitive market. We show that this ﬁnding no longer holds when the terms are determined in a non-competitive way. Our results imply that the presence of a “fundamental transformation” (i.e., the transition from a competitive market to a bilateral relationship) is important for a contract to become a reference point. To the best of our knowledge this behavioral aspect of the fundamental transformation has not been shown before. (JEL: C91, D03, D23)
We argue that a contract provides a reference point for a trading relationship: more precisely, for parties’ feelings of entitlement. A party’s ex post performance depends on whether he gets what he is entitled to relative to outcomes permitted by the contract. A party who is shortchanged shades on performance. A ﬂexible contract allows parties to adjust their outcomes to uncertainty but causes inefﬁ- cient shading. Our analysis provides a basis for long-term contracts in the absence of noncontractible investments and elucidates why “employment” contracts, which ﬁx wages in advance and allow the employer to choose the task, can be optimal.
Insolvency practitioners from 88 countries describe how debt enforce- ment will proceed against an identical hotel about to default on its debt. We use the data on time, cost, and the likely disposition of the assets (preservation as a going concern vs. piecemeal sale) to construct a measure of the efﬁciency of debt enforcement in each country. This measure is strongly correlated with per capita income and legal origin and predicts debt market development. Several characteristics of debt enforcement procedures, such as the structure of appeals and avail- ability of ﬂoating charge ﬁnance, inﬂuence efﬁciency.
This paper evaluates the primary mechanisms for changing management or obtaining control in publicly traded corporations with dispersed ownership. Specifically, we analyze and compare three mechanisms: (1) proxy fights (voting only); (2) takeover bids (buying shares only); and (3) a combination of proxy fights and takeover bids in which shareholders vote on acquisition offers. We first show how proxy fights unaccompanied by an acquisition offer suffer from substantial shortcomings that limit the use of such contests in practice. We then argue that combining voting with acquisition offers is superior not only to proxy fights alone but also to takeover bids alone. Finally, we show that, when acquisition offers are in the form of cash or the acquirer’s existing securities, voting shareholders can infer from the pre-vote market trading which outcome would be best in light of all the available public information. Our analysis has implications for the ongoing debates in the US over poison pills and in Europe over the new EEC directive on takeovers.
Hart, Oliver. 1999. “Different Approaches to Bankruptcy.” Governance, Equity and Global Markets, Proceedings of the Annual Bank Conference on Development Economics in Europe, June 21-21, 1999. Paris: La Docmentation Francaise, 2000.