Abstract We study the structure of public firm buyouts in a model that features the Berle-Means problem (lack of incentives) and the Grossman-Hart problem (holdout). We find that bootstrapping, debt in excess of funding needs, and upfront fees to bidders are socially optimal and increase buyout premiums. These elements make LBO financing tantamount to a “management contract” arranged by an outside manager to receive cash and incentives to manage a firm—except the cash is funded by excess debt imposed on the firm. Our model also rationalizes why PE firms collect fees from their equity partnerships and directly from target firms.

Mixture choice data consist of the joint distribution of choices of a group of agents from a collection of menus, comprising the implied stochastic choice function plus any cross-menu correlations. When agents are heterogeneous with respect to both preferences and other aspects of cognition, we show that these two determinants of behavior are identified simultaneously by suitable mixture choice data. We also demonstrate how this finding can be extended to allow for specialized assumptions about cognition, focusing on models of random satisficing thresholds and “quantal Fechnerian” choice.