In February, a pharmaceutical company, Drugs R Us, lobbies the government to legalize a new drug...

 

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In February, a pharmaceutical company, Drugs R Us, lobbies the government to legalize a new drug called Drug X. Drugs R Us spends x"/a to lobby the government, where x is the probability of the government legalizing Drug X and a > 1. In March, the Drugs R Us and its supplier, Pills Inc., discover whether Drug X is legalized. If so then the value of one unit of Drug X to Drugs R Us is v > 0 and 0 otherwise. Pills Inc. can supply a unit of Drug X at cost c. Assume bargaining leads to an equal split of any surplus and that r is non-contractable. Derive a condition under which it is more efficient for Drugs R Us to control Pills Inc. In February, a pharmaceutical company, Drugs R Us, lobbies the government to legalize a new drug called Drug X. Drugs R Us spends x"/a to lobby the government, where x is the probability of the government legalizing Drug X and a > 1. In March, the Drugs R Us and its supplier, Pills Inc., discover whether Drug X is legalized. If so then the value of one unit of Drug X to Drugs R Us is v > 0 and 0 otherwise. Pills Inc. can supply a unit of Drug X at cost c. Assume bargaining leads to an equal split of any surplus and that r is non-contractable. Derive a condition under which it is more efficient for Drugs R Us to control Pills Inc.

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