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The Agency Cost of Internal Collusion and Schumpeterian Growth

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Author Info
David Martimort
Thierry Verdier

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Abstract

This paper analyses the link between the internal organization of the firm andthe growth process. We present a Schumpeterian growth model in whichmonopoly firms face agency costs due to collusion between managers insidethe organization. These costs affect incentives to invest and the rate ofinnovation in the economy. When collusion is self-enforcing, higher growth andmore creative destruction shortens in turn the time horizon of colludingagents in the organization and makes internal collusion more difficult tosustain. We analyse this two-way mechanism between growth and agencyproblems and show how the transaction costs of side-contracting within thefirm and the growth rate of the economy are simultaneously derived. Copyright The Review of Economic Studies Limited, 2004.

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Article provided by Blackwell Publishing in its journal Review of Economic Studies.

Volume (Year): 71 (2004)
Issue (Month): 4 (October)
Pages: 1119-1141
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Handle: RePEc:bla:restud:v:71:y:2004:i:4:p:1119-1141

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Jean Tirole, 1985. "Hierarchies and Bureaucracies," Working papers 363, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Acemoglu, D. & Zilibotti, F., 1998. "Information Accumulation in Development," Papers 652, Stockholm - International Economic Studies.
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  3. Jonathan Levin, 2000. "Relational Incentive Contracts," Working Papers 01002, Stanford University, Department of Economics. [Downloadable!]
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  4. Stein, Jeremy C, 1997. "Waves of Creative Destruction: Firm-Specific Learning-by-Doing and the Dynamics of Innovation," Review of Economic Studies, Blackwell Publishing, vol. 64(2), pages 265-88, April. [Downloadable!] (restricted)
  5. Aghion, P. & Howitt, P., 1989. "A Model Of Growth Through Creative Destruction," UWO Department of Economics Working Papers 8904, University of Western Ontario, Department of Economics.
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  6. Faure-Grimaud, Antoine & Laffont, Jean-Jacques & Martimort, David, 2003. "Collusion, Delegation and Supervision with Soft Information," IDEI Working Papers 167, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
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  7. Drew Fudenberg & David K. Levine & Eric Maskin, 1994. "The Folk Theorem with Imperfect Public Information," Levine's Working Paper Archive 394, David K. Levine. [Downloadable!]
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  8. Martimort, David, 1999. "The Life Cycle of Regulatory Agencies: Dynamic Capture and Transaction Costs," Review of Economic Studies, Blackwell Publishing, vol. 66(4), pages 929-47, October. [Downloadable!] (restricted)
  9. Myerson, Roger B, 1979. "Incentive Compatibility and the Bargaining Problem," Econometrica, Econometric Society, vol. 47(1), pages 61-73, January. [Downloadable!] (restricted)
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  10. Aghion, Philippe & Dewatripont, Mathias & Rey, Patrick, 1999. "Competition, Financial Discipline and Growth," CEPR Discussion Papers 2128, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  11. Maskin, Eric, 1999. "Nash Equilibrium and Welfare Optimality," Review of Economic Studies, Blackwell Publishing, vol. 66(1), pages 23-38, January. [Downloadable!] (restricted)
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  12. Martimort, D. & Verdier, T., 1999. "The Internal Organization of the Firm, Transaction Costs and Macroeconomic Growth," DELTA Working Papers 1999-08, DELTA (Ecole normale supérieure).
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  13. David Thesmar & Mathias Thoenig, 2000. "Creative Destruction And Firm Organization Choice," The Quarterly Journal of Economics, MIT Press, vol. 115(4), pages 1201-1237, November. [Downloadable!] (restricted)
  14. Bernheim, B. Douglas & Peleg, Bezalel & Whinston, Michael D., 1987. "Coalition-Proof Nash Equilibria I. Concepts," Journal of Economic Theory, Elsevier, vol. 42(1), pages 1-12, June. [Downloadable!] (restricted)
  15. Patrick Francois & Joanne Roberts, 2003. "Contracting Productivity Growth," Review of Economic Studies, Blackwell Publishing, vol. 70(1), pages 59-85, January.
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Ottaviano, Gianmarco Ireo Paolo, 2007. "Contract Enforcement, Comparative Advantage and Long-Run Growth," CEPR Discussion Papers 6419, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  2. Antoine Faure-Grimaud & Jean-Jacques Laffont & David Martimort, 2003. "Risk Averse Supervisors and the Efficiency of Collusion," The B.E. Journal of Theoretical Economics, Berkeley Electronic Press, vol. 0(1). [Downloadable!]
  3. Straub, Stephane, 2008. "Infrastructure and development : a critical appraisal of the macro level literature," Policy Research Working Paper Series 4590, The World Bank. [Downloadable!]
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