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Review of Managerial Science
Erschienen in: Review of Managerial Science 1/2014

01.01.2014 | Original Paper

Shutdown contests in multi-plant firms

verfasst von: Matthias Kräkel

Erschienen in: Review of Managerial Science | Ausgabe 1/2014

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Abstract

When multi-plant firms face a declining demand, they typically have to close one or more locations. In that case, the firm can organize a shutdown contest among the plants to generate extra incentives. Within a two-plant model, I discuss the impact of plant size, workers’ outside options and bargaining power on the profitability of such contest. Whereas the influence of plant size is ambiguous, the firm prefers a shutdown contest to an immediate closure of the less productive location if the more productive plant’s bargaining power is large relative to that of the less productive one. In that case, the more productive workforce spends much effort and has a high probability to survive. If the multi-plant firm is an international corporation, auctioning off the decision right which plant to close can be profitable for the firm, since each country is interested in protecting its domestic plant. From the firm’s perspective, such bidding dominates a shutdown contest if national costs from plant closure are sufficiently large relative to extra profits generated by the contest.
Vorheriger Artikel What factors drive personal loan fraud? Evidence from Germany

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Fußnoten
1
See, among many others, Lieberman (1990).
 
2
There is a rich empirical literature that measures plant profitability or productivity, e.g., Deily (1988, 1991), Baden-Fuller (1989), Stafford (1991), Olley and Pakes (1996), Gibson and Harris (1996), Kirkham and Watts (1997), Bernard and Jensen (2007). As the empirical researchers are able to rank plants according to profitability or productivity, the firm should be able to do this as well.
 
3
See Ward’s Auto World (1992) cited by Drago et al. (1996).
 
4
See Associated Press (2005).
 
5
See, for example, Bunkley (2009), Hargreaves (2009).
 
6
For example, in 2001, Bombardier closed 3 of its 27 European factories. In July 2008, Starbucks announced to close 600 of its under performing shops.
 
7
For example, low-productive plants may employ workers with poor qualifications and bad outside options. Especially these workers should have very high incentives to win the plant-closing contest.
 
8
The case of GM has shown that firms repeatedly organize shutdown contests.
 
9
Moreover, each modern firm uses managerial accounting as basis for its policy decisions.
 
10
If plant productivities are not known to the firm, shutdown contests may have an additional advantage in form of eliciting valuable information on plant productivities. Therefore, our results show that even in the absence of such informational advantage shutdown contests may be preferred by the firm as a pure incentive device.
 
11
For an overview see Brander (1995).
 
12
For example, the workforces differ in their human capital endowments.
 
13
The simplifying assumption of homogeneous workforces allows to use the same subscript p for the plant type and the corresponding worker type. This assumption sketches a more realistic situation where one plant has more high-productive workers than the other plant.
 
14
Since I do not consider optimal incentive contracts, this simplifying assumption is not crucial.
 
15
See, e.g., Svejnar (1986) and Goerke and Holler (1997, pp. 178–184) on bargaining power in wage-bargaining settings.
 
16
I thank an anonymous referee for suggesting this interpretation.
 
17
See already Spindler (1974, 1976) on endogenous bargaining power.
 
18
Alternatively, we could imagine that workers cannot be sure that E shuts down plant h in case of π h  < π l . E.g., suppose for the outcome π h  < π l that E closes plant h only with probability \(q\in(0,1]. \) The qualitative results would remain the same, but workers’ overall efforts and, hence, the attractiveness of a shutdown contest would decrease in 1 − q.
 
19
Contrary to the standard tournament-approach by Lazear and Rosen (1981), this setting guarantees the existence of pure-strategy equilibria at the tournament stage. For the two-player case see Gürtler and Kräkel (2012).
 
20
To guarantee that \(\lambda \left( A_{p}\right)\in(0,1]\) I assume that ρ is sufficiently small and θ sufficiently large. The assumption of a linear λ-function is also referred to as the Linear Distribution Function Condition (LDFC); see Hart and Holmström (1987), p. 84.
 
21
Since regular first-period profits do not influence workers’ behavior they can be skipped in the objective function.
 
22
Note that the second-order condition is always satisfied.
 
23
Note that if α p was a function of worker productivity, this would reinforce the impact of γ p .
 
24
This effect is also important for explaining the group-size paradox (see, e.g., Nitzan 1991).
 
25
If α p was an increasing function of n p , this modification would work against the two other effects of n p .
 
26
Although plant size n p is an integer, for simplicity it is treated as being continuous when doing comparative statics.
 
27
This means, the larger the set of parameter constellations that satisfy (5).
 
28
See Dempsey (2009), Jolly and Dempsey (2009).
 
29
See Jolly (2010). Richbell and Watts (2000) analyzed four cases of international multi-unit firms (Hoover, JVC, Siemens, Avesta Sheffield). In each of these cases, one of two plants had to be closed. In two cases the plant was retained that had the same location as the firm’s headquarter; in the two other cases significant financial aid came from the government of the plant that won survival.
 
30
Note that even within a country we may have a similar situation if plants are located in different regions belonging to different regional governments.
 
31
Anecdotal evidence again comes from the case of Opel. In 2009, the German government ordered 1,101 cars worth 20.5 million euro from its domestic Opel plants, which should be used as staff cars. In 2010, additional 1,046 cars have been ordered from Opel by the German government.
 
32
In that case, a worker receives \({\bar{v}}_{p}\) at his new employer.
 
33
Costs κ contain unemployment benefits so that a worker again receives \({\bar{v}}_{p}\) in period 2. Note that this assumption as well as the assumption that reservation values for period 2 only depend on the worker’s type but not on the status of a worker (i.e., employed versus unemployed) are not crucial but only made for simplicity.
 
34
Otherwise, E would close plant l for sure in the basic model. In that case, bidding is rather simple: G l must pay at least \({\hat{r}}_{l}:=\left[\left( 1-\alpha _{h}\right) {\Uppi}_{h}-\left( 1-\alpha_{l}\right){\Uppi}_{l}\right] \) to E in order to protect its domestic plant. Whether G l or G h wins the auction will depend on the magnitude of G h ’s willingness-to-pay in comparison to the difference between G l ’s willingness-to-pay and \({\hat{r}}_{l}.\)
 
35
Although these costs are purely monetary, we could also imagine that politicians alternatively calculate their political costs resulting from negative publicity in the media due to plant closing and missing governmental support.
 
36
Recall that E is indifferent between payments r h and r l by the respective governments so that the relative willingness-to-pay, k p  − r p , is decisive for E.
 
37
Recall that r l and r h are common knowledge. Thus, G p is perfectly informed about these two values and his own willingness-to-pay, k p . However, G p does not know the exact value of the other government’s willingness-to-pay, \(k_{{\hat{p}}}; \) it only knows an ordinal ranking between \(k_{{\hat{p}}}\) and the other three parameters. The employer E is least informed as he does not know the exact value of either k l or k h .
 
38
For the parameterized case we obtain \(\lambda \left(n_{p}a_{p}^{\ast}\right) =\left(\alpha_{p}{\Uppi}_{p}-n_{p}{\bar{v}}_{p}\right) \frac{\sigma \left(s_{p}\right) \gamma_{p}\rho^{2}\Updelta F}{\theta}. \)
 
39
Recall that the technology effect is absent in the parameterized version.
 
40
For example, following the approach by Wintrobe and Breton (1986) managers may be primarily interested to protect their investments in trust, thus distorting selection efficiency.
 
41
For anecdotal evidence on the influence of labor unions and the location of the headquarter on the plant-closing decision see the cases reported by Richbell and Watts (2000).
 
42
Since the monotone likelihood ratio property implies first-order stochastic dominance (e.g., Wolfstetter 1999, p. 139) we have \(\int_{{\underline{\pi}}}^{{\bar{\pi}}}Y\left(\pi_{{\hat{p}}}\right) \left[ f_{H}\left( \pi_{{\hat{p}}}\right)-f_{L}\left( \pi_{{\hat{p}}}\right) \right] d\pi_{{\hat{p}}}>0\) for any increasing function \(Y\left( \cdot \right) . \) Using \(Y\left(\pi_{{\hat{p}}}\right) =F_{H}\left( \pi_{{\hat{p}}}\right)\) and (10), immediately leads to \(\int_{{\underline{\pi}}}^{{\bar{\pi}}}F_{H}\left(\pi_{{\hat{p}}}\right) f_{L}\left( \pi_{{\hat{p}}}\right)d\pi_{{\hat{p}}}<\frac{1}{2}. \)
 
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Metadaten
Titel
Shutdown contests in multi-plant firms
verfasst von
Matthias Kräkel
Publikationsdatum
01.01.2014
Verlag
Springer Berlin Heidelberg
Erschienen in
Review of Managerial Science / Ausgabe 1/2014
Print ISSN: 1863-6683
Elektronische ISSN: 1863-6691
DOI
https://doi.org/10.1007/s11846-013-0102-8

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