All the way back in 1988, Andrei Schleifer and Lawrence Summers posited that leveraged buyouts may result in companies being run less efficiently if buyers are able to use their newfound control to break the company’s relational contracts (e.g. defunding pensions). Since then the size of the financial sector in industrialised economies has grown apace. Compelling empirical evidence suggests that financialisation is a major contributor to income inequality (Lin and Tomaskovic-Devey, 2013) and might actually impede economic growth (Arcand, Berkes, and Panizza, 2015).
A big unanswered question is how investors profit by running firms inefficiently, and why they are able to out-compete firms which honour their relational contracts. One answer may lie in the microeconomics of firm organisation: Fehr, Gächter, and Kirchsteiger (1997) show that relational contracts can sometimes reduce profits even when they improve efficiency. So principals may extract more rents when they are untrustworthy. We still don’t know why allowing ownership to change hands in financial markets would cause a shift in organisational strategy however.
The investigator seeks proposals that will utilise game theoretic methods to explain why financial markets may favour the survival of myopic management strategies. We foresee the results of such an explanation yielding policy insights which might improve firm governance and reduce economic inequality. The implications of these models should eventually also be tested in laboratory experiments and novel predictions taken to existing secondary data on firms.
Department of Economics, University of Reading:
The Department of Economics has a long and established track record of research, working with a wide variety of industrial and academic partners to achieve significant social and economic benefits. Research activity within the Department is broad and extensive; among our most active fields are business economics, development economics, behavioural economics, labour economics and sports economics.
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