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Incomplete contracts and competition: another look at fisher body/general motors?

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  • Antonio Nicita

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  • Simone Sepe
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    Abstract

    In this paper we analyze the problem of the enforcement of incomplete contracts with endogenous outside options. Some of the equilibria we outline may reverse one of the main results presented in the standard literature. We then revisit the literature on the highly debated Fisher Body/General Motors merger and suggest an explanation based on GM’s need to control the Fisher brothers’ outside options. Copyright Springer Science+Business Media, LLC 2012

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    File URL: http://hdl.handle.net/10.1007/s10657-010-9166-y
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    Bibliographic Info

    Article provided by Springer in its journal European Journal of Law and Economics.

    Volume (Year): 34 (2012)
    Issue (Month): 3 (December)
    Pages: 495-514

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    Handle: RePEc:kap:ejlwec:v:34:y:2012:i:3:p:495-514

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    Web page: http://www.springerlink.com/link.asp?id=100264

    Related research

    Keywords: Incomplete contracts; Hold-up problem; Transaction costs; Endogenous outside options; Cross competition; Vertical integration; D23; L12; L14; L21; L22; L42;

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    References

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    1. Casadesus-Masanell, Ramon & Spulber, Daniel F, 2000. "The Fable of Fisher Body," Journal of Law and Economics, University of Chicago Press, vol. 43(1), pages 67-104, April.
    2. Anke S. Kessler & Christoph Lülfesmann, 2006. "The Theory of Human Capital Revisited: on the Interaction of General and Specific Investments," Economic Journal, Royal Economic Society, vol. 116(514), pages 903-923, October.
    3. Sloof, Randolph & Sonnemans, Joep & Oosterbeek, Hessel, 2004. "Specific investments, holdup, and the outside option principle," European Economic Review, Elsevier, vol. 48(6), pages 1399-1410, December.
    4. Freeland, Robert F, 2000. "Creating Holdup through Vertical Integration: Fisher Body Revisited," Journal of Law and Economics, University of Chicago Press, vol. 43(1), pages 33-66, April.
    5. Hart, Oliver & Moore, John, 1990. "Property Rights and the Nature of the Firm," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1119-58, December.
    6. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August.
    7. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817, September.
    8. Coase, R H, 2000. "The Acquisition of Fisher Body by General Motors," Journal of Law and Economics, University of Chicago Press, vol. 43(1), pages 15-31, April.
    9. MacLeod, W Bentley & Malcomson, James M, 1993. "Investments, Holdup, and the Form of Market Contracts," American Economic Review, American Economic Association, vol. 83(4), pages 811-37, September.
    10. Andreas Roider, 2006. "Fisher Body revisited: Supply contracts and vertical integration," European Journal of Law and Economics, Springer, vol. 22(2), pages 181-196, September.
    11. Oliver D. Hart, 1987. "Incomplete Contracts and the Theory of the Firm," Working papers 448, Massachusetts Institute of Technology (MIT), Department of Economics.
    12. Helper, Susan & MacDuffie, John Paul & Sabel, Charles, 2000. "Pragmatic Collaborations: Advancing Knowledge While Controlling Opportunism," Industrial and Corporate Change, Oxford University Press, vol. 9(3), pages 443-87, September.
    13. Langlois, Richard N. & Robertson, Paul L., 1989. "Explaining Vertical Integration: Lessons from the American Automobile Industry," The Journal of Economic History, Cambridge University Press, vol. 49(02), pages 361-375, June.
    14. Ugo Pagano, 2000. "Public Markets, Private Orderings and Corporate Governance," ESRC Centre for Business Research - Working Papers wp166, ESRC Centre for Business Research.
    15. Kalyan Chatterjee & Y. Stephen Chiu, 2000. "When Does Competition Lead to Efficient Investments?," Econometric Society World Congress 2000 Contributed Papers 0518, Econometric Society.
    16. Klein, Benjamin & Crawford, Robert G & Alchian, Armen A, 1978. "Vertical Integration, Appropriable Rents, and the Competitive Contracting Process," Journal of Law and Economics, University of Chicago Press, vol. 21(2), pages 297-326, October.
    17. Shingo Ishiguro, 2010. "Holdup, search, and inefficiency," Economic Theory, Springer, vol. 44(2), pages 307-338, August.
    18. Ronald Coase, 2006. "The Conduct of Economics: The Example of Fisher Body and General Motors," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 15(2), pages 255-278, 06.
    19. David De Meza & Ben Lockwood, 1998. "Does Asset Ownership Always Motivate Managers? Outside Options And The Property Rights Theory Of The Firm," The Quarterly Journal of Economics, MIT Press, vol. 113(2), pages 361-386, May.
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