Endogenous Interlocking Directorates
27 Pages Posted: 8 May 2018 Last revised: 19 Feb 2019
Date Written: February 17, 2019
This paper analyzes the choice to interlock, that is, the decision to have an executive sitting in the board of the rival company. This choice is analyzed within a duopoly where firms with hidden marginal costs of production compete in the product market. Interlocking directorates may emerge as an equilibrium outcome whenever firms gain by exchanging information on their private costs. Our results depart from the information sharing literature, depending on the nature of the agreement between the two companies. When a company needs to be invited to form a tie, then the degree of efficiency of the inviting company affects the occurrence and the type of the interlocking. The equilibrium outcome can take different forms: unilateral, bilateral interlocking or no interlocking. Only efficient firms form bilateral interlocking, while in the case of unilateral interlocking it is the inefficient firm to form the tie. We derive also the welfare implications of the different equilibria.
Keywords: Interlocking Directorates; Boards; Information Sharing; Oligopoly
JEL Classification: D48, L22, M12
Suggested Citation: Suggested Citation