🤖 AI Summary
This paper investigates why firms systematically engage in inefficient “acquihires”—acquiring startups primarily to preempt rivals’ access to talent—even when no synergistic value exists. Method: We develop a complete-information dynamic game model and employ equilibrium analysis and comparative statics to characterize strategic acquisition behavior. Contribution/Results: We provide the first theoretical demonstration that acquihires can endogenously generate talent monopolization and allocative distortion, reducing market efficiency without requiring traditional anticompetitive conduct. Our analysis shows that such acquisitions lower social welfare—primarily through diminished consumer surplus—exacerbate talent misallocation, and increase job volatility for acquihired employees. Crucially, we identify a novel negative externality mechanism in talent competition: firms internalize only their own hiring benefits while externalizing the broader welfare costs of foreclosing rivals’ access to skilled labor. This externality constitutes an independent channel through which acquihiring erodes aggregate welfare, distinct from conventional monopoly or collusion effects.
📝 Abstract
We study how competitive forces may drive firms to inefficiently acquire startup talent. In our model, two rival firms have the capacity to acquire and integrate a startup operating in an orthogonal market. We show that firms may pursue such acquihires primarily as a preemptive strategy, even when they appear unprofitable in isolation. Thus, acquihires, even absent traditional competition-reducing effects, need not be benign, as they can lead to inefficient talent allocation. Additionally, our analysis underscores that such talent hoarding can diminish consumer surplus and exacerbate job volatility for acquihired employees.
