Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 563: The Insiders' Dilemma: An Experiment on Merger Formation

Tobias Lindqvist and Johan Stennek
Additional contact information
Tobias Lindqvist: The Research Institute of Industrial Economics, Postal: P.O. Box 55665, SE-102 15 Stockholm, Sweden
Johan Stennek: The Research Institute of Industrial Economics, Postal: P.O. Box 55665, SE-102 15 Stockholm, Sweden

Abstract: This paper tests the insiders' dilemma hypothesis in a laboratory experiment. The insiders' dilemma means that a profitable merger does not occur, because it is even more profitable for each firm to unilaterally stand as an outsider (Kamien and Zang, 1990 and 1993). The experimental data provides support for the insiders' dilemma, and thereby for endogenous rather than exogenous merger theory. More surprisingly, our data suggests that fairness considerations also make profitable mergers difficult. Mergers that should occur in equilibrium do not, since they require an unequal split of surplus.

Keywords: Coalition Formation; Experiment; Insiders' Dilemma; Mergers; Antitrust

JEL-codes: C78; C92; G34; L13; L41

30 pages, September 19, 2001

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