We model a competitive industry where managers choose quantities and costs to maximize a combination of firm profits and private benefits from expropriation. Expropriation is possible because of corporate governance 憇lack?permitted by the government. We show that corporate governance slack induces managers to choose levels of output and costs that are higher than would otherwise be optimal. This, in turn, benefits consumers because the equilibrium price is lower. The model shows that for every economic system, and depending on industry structure and the government's objective, there is an optimal level of expropriation that maximizes social welfare. Some mechanisms suggested by the literature as e.ective at improving investor protection杔egal change, firms voluntarily opting into more protective systems, domestic mergers do not work once competition is considered. We provide a theoretical argument showing the e.cacy of cross-border mergers. Thestronger corporate governance of a foreign acquirer, imposed on the domestic target firm, benefits merging shareholders and those of competing unmerged domestic firms.
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