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Agency Costs and the Limits of Integration

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  • Trond E. Olsen

Abstract

In this article I identify a type of integration cost that is associated with agency relations within the firm. This cost arises when the firm's principal cannot fully commit to long-term contracts with the firm's agents, and these agents have private information. In the model, integration can lead to value enhancements through the realization of complementarity gains. But this will also lead to larger rents, which is costly for the principal. I show that this type of cost may be sufficiently large to act as an effective limit for integrations that are otherwise profitable.

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Bibliographic Info

Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 27 (1996)
Issue (Month): 3 (Autumn)
Pages: 479-501

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Handle: RePEc:rje:randje:v:27:y:1996:i:autumn:p:479-501

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Cited by:
  1. Will, Heide C. U., 1998. "Management Style in Decision Making: Top Down or Bottom Up?," Discussion Paper Serie A, University of Bonn, Germany 577, University of Bonn, Germany.
  2. Shin, Dongsoo & Strausz, Roland, 2014. "Delegation and Dynamic Incentives," CEPR Discussion Papers, C.E.P.R. Discussion Papers 9929, C.E.P.R. Discussion Papers.
  3. Faure-Grimaud, A. & Reiche, S., 2006. "Dynamic yardstick mechanisms," Games and Economic Behavior, Elsevier, Elsevier, vol. 54(2), pages 316-335, February.
  4. Antoine Faure-Grimaud & Sonje Reiche, 2003. "Dynamic yardstick regulation," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 19319, London School of Economics and Political Science, LSE Library.
  5. Sherrill Shaffer, 1997. "Network diseconomies and optimal structure," Working Papers 97-19, Federal Reserve Bank of Philadelphia.

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