Working Paper: CEPR ID: DP16362
Authors: Esmee Dijk; Jos Luis Moraga-Gonzalez; Evgenia Motchenkova
Abstract: A start-up engages in an investment portfolio problem by choosing how much to invest in a “rival” project, which threatens the position of an existing incumbent, and a “non-rival” project. Anticipating its acquisition by the incumbent, the start-up strategically distorts its portfolio of projects to increase the (expected) acquisition rents. Depending on parameters, such a strategic distortion may result in an alignment or a misalignment of the direction in which innovation goes relative to what is socially optimal. Moreover, prohibiting acquisitions may increase or decrease consumer surplus. The more (less) the rival project threatens the incumbent and the less (more) the non-rival project appropriates the social surplus, the more likely is that consumers benefit (suffer) following an acquisition. These results are robust to acquisitions where the acquirer takes over the research facilities of the start-up.
Keywords: startups; acquisitions; mergers; innovation; portfolios; competition policy; antitrust
JEL Codes: O31; L13; L41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| startup acquisition (M13) | distortion of investment portfolio (G11) |
| distortion of investment portfolio (G11) | investment in rival project (G31) |
| distortion of investment portfolio (G11) | investment in nonrival project (H43) |
| relative acquisition rents (R33) | distortion of investment portfolio (G11) |
| acquisition rents favoring successful projects (R33) | investment in rival projects (G31) |
| acquisition rents favoring unsuccessful projects (R33) | investment in nonrival projects (H40) |
| prohibiting acquisitions (G34) | consumer surplus (D46) |
| distortion of investment portfolio (G11) | social welfare misalignment (I39) |