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Baron Diermeier (2006) - Strategic Activism And Nonmarket Strategy (view source)
Revision as of 19:05, 28 February 2011
, 19:05, 28 February 2011no edit summary
There are two (types of) players:
*A firm (target) with a concave profit function <math>\pi(\cdot)\,</math> that has negative slope (i.e. <math>\pi'(\cdot)<0\,</math>), that has a default activity <math>x_0\,</math>
**Firms may be Strategic (and responsive to demands) with probability <math>p\,</math>, or Recalcitrant with probability <math>1-p\,</math>
*An activist with a strictly increasing utility function <math>v(\cdot)\,</math>
Substituting this into the activitist's utility function and maximizing with respect to <math>x_D\,</math> and <math>h\,</math> give two first order conditions that the optimal campaign must satisfy, as well as <math>r^* = \pi(x_0) - \pi(x_D^*) -h^*\,</math>, providing the gain to the campaign is positive:
:<math>G = u(x_D^*,r^*,h^*) - v(x_0)\ge 0\,</math>
If this condition is not satisfied then the activist doesn't conduct the campaignand target does not change practices.
From here on we will assume that:
*<math>v(x)=\gamma x\,</math> : <math>\gamma\,</math> is the marginal valuation of the target's practices
*<math>\pi(x) = \overline(\pi) - \eta x\,</math> : <math>\eta\,</math> acts as a marginal cost of conceding
*<math>c(r) = \alpha r^2\,</math> : When rewards are difficult to provide <math>\alpha\,</math> is high
*<math>g(h) = \beta h^2\,</math> : When harm is expensive <math>\beta\,</math> is high
