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Optimal Cross Holding with Externalities and Strategic interactions

Clayton, Matthew J. and Jorgensen, Bjorn N. (2005) Optimal Cross Holding with Externalities and Strategic interactions. Journal of Business, 78 (4). pp. 1505-1522. ISSN 0740-9168

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Abstract

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.

Item Type: Article
Official URL: http://www.press.uchicago.edu/journals.html
Additional Information: © 2005 The Authors
Library of Congress subject classification: H Social Sciences > HB Economic Theory
Sets: Departments > Accounting
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Date Deposited: 07 Aug 2013 13:31
URL: http://eprints.lse.ac.uk/51341/

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