The Value of Interlocking Directorates in Vertical Contracting

19 Pages Posted: 2 Sep 2021

See all articles by Maria Rosa Battaggion

Maria Rosa Battaggion

University of Bergamo

Vittoria Cerasi

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS)

Gülen Karakoç

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS)

Date Written: September 2, 2021

Abstract

This study analyzes the choice to interlock between two competing companies when their privately known marginal costs are correlated. The two rivals are organized into different business models: one delegates its production to a subcontractor, while the other is vertically integrated and carries its production in-house. By accepting the interlock, the hosting company discloses its marginal cost to the rival. The two companies decide ex-ante whether to commit to interlock. In a Perfect Bayesian Equilibrium, the vertically separated company gains more from interlocking than the rival because it saves on internal agency costs and gains market power, otherwise unbalanced toward the competitor. Interestingly, we show the following: for high-cost correlation allowing a unilateral interlock benefits consumers. Hence, our results provide reasons for approving horizontal interlocking in markets where companies have asymmetric business models, and the interlocking company outsources its production.

Keywords: Interlocking directorates; Agency costs; Vertical hierarchy

JEL Classification: D43, D82, D83, L2

Suggested Citation

Battaggion, Maria Rosa and Cerasi, Vittoria and Karakoç, Gülen, The Value of Interlocking Directorates in Vertical Contracting (September 2, 2021). University of Milan Bicocca Department of Economics, Management and Statistics Working Paper No. 480, Available at SSRN: https://ssrn.com/abstract=3916383

Maria Rosa Battaggion

University of Bergamo

Via Salvecchio, 19
Bergamo, 24129
Italy

Vittoria Cerasi (Contact Author)

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS) ( email )

Piazza dell'Ateneo Nuovo, 1
Milan, 20126
Italy
+39-02-64485821 (Phone)
+39-02-64485878 (Fax)

Gülen Karakoç

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS) ( email )

Piazza dell'Ateneo Nuovo, 1
Milan, 20126
Italy

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