Product market competition and property rights allocation

The first chapter reviews the literature on competition and incentives.; The second paper studies the effects of competition on property rights allocation between investors and entrepreneurs. In a duopoly setting where two entrepreneurs sell competing products, each entrepreneur is associated with an investor who allocates control rights over the project. While both agents can exert effort to affect product quality, the better informed entrepreneur can increase quality at a relatively lower cost. When control is transferred from investor to entrepreneur, the latter's incentives to exert effort increase at the expense of the former's; due to the entrepreneur's informational advantage, this results in a net increase in product quality. Delegating control has a cost in that it transfers ex-post bargaining power to the entrepreneur and forces the investor to forfeit part of the profits. We show how competition, measured by product substitutability, affects the investor's benefit and cost of delegating control. We analyze the equilibrium allocation of property rights in the industry, and we discuss applications of the model.; The third chapter focuses on competition and the efficiency of external financing relative to internal financing. Two managers, who compete to sell their product to a unique consumer, must make a debt repayment to their own investor. The successful manager is able to make the repayment and competes again in the following period. The unsuccessful manager defaults on debt and project management is then given to a newcomer who competes with the incumbent manager. At the beginning of the game, each firm has a continuation value—expected future profits if the manager is successful in the first period, and liquidation value—expected profits if the manager is unsuccessful and forced to default.; I develop a model where the manager's superior efficiency relative to the investors generates the following results. (1) A switch from internal to external financing tends to increase continuation value, at the expense of liquidation value. (2) Competition has a positive effect on this rise in liquidation value, and has a negative effect on the fall in liquidation value. Thus, competition tends to favor external financing.