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The vast empirical literature on strategic alliances has often overlooked their theoretical foundations. We pose a hypothesis: do small and medium enterprises run by professional managers (managerial firms) have a rationale to incur in more alliances than firms run by their owners (entrepreneurial firms)? We consider an industry whose firms may decide to enter or not enter an alliance that decreases the marginal costs for members, while leaving them to operate on a non-cooperative basis. When firms are run by their owners, an alliance is more likely to be implemented the fewer the members of the alliance, while the optimal alliance size is very small as compared to the number of firms in the industry. However, when firms are run by managers (with separation of ownership and control), an alliance is always profitable for the members, irrespective of the synergy it leads to, and is therefore more likely to occur with managerial firms than with entrepreneurial firms. Thus, in a professionalized sector, we should not only observe more alliances but also larger alliances than in an entrepreneurial environment. In any case, since alliances never incorporate all firms, a desirable public policy may be to promote cooperation among firms prior to the market stage. The results are discussed in relation to the empirical literature. [ABSTRACT FROM AUTHOR]

This paper examines the profitability of alliances and mergers as strategic substitutes for entrepreneurial firms to obtain a cost-cutting advantage. In a Cournot oligopoly with linear demand, constant marginal costs and a subset of firms choosing whether to ally or merge, the preference of a device or the other depends on the number of firms in the industry, their efficiency degree before the agreement, the number of collaborating firms, and the amount of cost saving achieved by the agreement. In general, given the number of firms in the market, an alliance is preferred when the cost-cutting achieved is large and a merge when it is low. Consumers, on the other hand, are always better with an alliance than with a merger. Finally, when aggregate welfare is considered, we characterize the scenarios where socially inefficient mergers or alliances would be implemented. We also discuss two assumptions of the model that might lead to the result that alliances are preferred the more competitors in the industry—a paradox that contradicts the basic tenets of industrial organization theory. [ABSTRACT FROM AUTHOR]

This paper explores a two-bank model in which, first, one bank correctly estimates the probability of low-quality loan repayment while the other overestimates it, and second, both banks have identical convex costs when granting loans. In this context of optimistically biased banking competition, we show how the unbiased bank follows the biased competitor as long as the bias of the latter is not too large. This would favour bad borrowers, who get better credit conditions at the expense of good borrowers. As a consequence, the presence of a biased bank increases welfare as long as the expected default rate is sufficiently high. Contrariwise, in subprime markets, biased banking competition would be socially harmful. [ABSTRACT FROM AUTHOR]

Behavioral biases may influence bank decisions when granting credit to their customers. This paper explores this possibility in an experimental setting, contributing to the literature in two ways. First, we designed a business simulation game that replicates the basic decision-making processes of a bank granting credit to clients under conditions of risk and uncertainty. Second, we implemented a series of short tests to measure participants' overconfidence and risk profile according to prospect theory and then conduct an experimental implementation of the simulation game. We find that higher levels of overprecision and risk seeking for gains (mostly attributable to distortion of probabilities) foster lower prices and higher volumes of credit, and reduce quality. The most consistent result is that distortion of probabilities affects the ability to discriminate between the quality of borrowers according to objective information, fostering strategies of lower loan prices to lower quality clients. The external validity of the results is also discussed. [ABSTRACT FROM AUTHOR]