Vertical Cross-Shareholding: Theory and Experimental Evidence

Posted: 21 Dec 2006

See all articles by Werner Guth

Werner Guth

Max Planck Institute of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Nikos Nikiforakis

New York University (NYU) - New York University Abu Dhabi

Hans-Theo Normann

Heinrich Heine University Dusseldorf - Department of Economics; Max Planck Institute for Research on Collective Goods

Abstract

This paper analyzes vertical cross-shareholding, that is, the mutual holding of a minority of shares between vertically related firms. First, we explore the issue in a game-theoretic model and show that cross-shareholding is sufficient to obtain efficient outcomes. We then test the model's predictions in an experiment. Theory predicts the seller decisions accurately but the buyer decisions only to a small extent. Buyers are more likely to agree on cross-shareholding than sellers in an attempt to avoid the winner's curse. Cross-shareholding occurs more frequently than predicted, and it increases the likelihood of trade.

Keywords: cross-shareholding, winner's curse, experiments, vertical merger

JEL Classification: L22, L25, L40

Suggested Citation

Güth, Werner and Nikiforakis, Nikos and Normann, Hans-Theo, Vertical Cross-Shareholding: Theory and Experimental Evidence. International Journal of Industrial Organization, Forthcoming. Available at SSRN: https://ssrn.com/abstract=952954

Werner Güth

Max Planck Institute of Economics ( email )

Kahlaische Strasse 10
D-07745 Jena, 07745
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Nikos Nikiforakis

New York University (NYU) - New York University Abu Dhabi ( email )

PO Box 129188
Abu Dhabi
United Arab Emirates

HOME PAGE: http://https://sites.google.com/site/nnikiforakis/home

Hans-Theo Normann (Contact Author)

Heinrich Heine University Dusseldorf - Department of Economics ( email )

Duesseldorf
Germany

Max Planck Institute for Research on Collective Goods ( email )

Kurt-Schumacher-Str. 10
D-53113 Bonn, 53113
Germany

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