Large Investors, takeovers, and the rule of law

There have been various studies of the effect of a large investor's position on t he price of an asset, typically assuming t hat agents' demands are exogenously-given functions of the current values of explanatory variables, but it often turns out that the resulting actions of the agents are not optimal for the (non-linear) market they then find themselves in. In this study, we suppose that a single large Investor declares at time 0 what (detenninistic) proportion of output he will consume at all future times, and the remaining agents respond optimally to the residual output process. The large agent must propose a plan which he can afford, and which would induce the other agents to agree to his plan (for otherwise they would simply form a market on their own). We compare this large agent's optimal choice with the equilibrium which would obtain if he did not attempt to exploit his large size but simply entered the market on an equal footing. We find that sometimes this can be advantageous. We also investigate circumstances under which the large agent might be better off at a later stage to walk out on his original deal.