Working Paper: CEPR ID: DP5911
Authors: Dennis Gärtner; Armin Schmutzler
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 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 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.
Keywords: asymmetric information; efficient mechanisms; interdependent valuations; mechanism design; mergers
JEL Codes: D82; G34; L10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| knowledge of outside option (D80) | efficient merger decisions (G34) |
| lack of knowledge of outside options (D89) | limited potential for regret-free implementation (D81) |
| relaxing budget balance conditions (E62) | feasibility of regret-free mergers (G34) |
| structure of negotiations (L14) | inevitability of regret in certain contexts (D81) |