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A Theory of Firm Scope

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  • Oliver Hart

    (Harvard University and National Bureau of Economic Research.)

  • Bengt Holmstrom

    (Massachusetts Institute of Technology and National Bureau of Economic Research.)

Abstract

The formal literature on firm boundaries has assumed that ex post conflicts are resolved through bargaining. In reality, parties often simply exercise their decision rights. We develop a model, based on shading, in which the use of authority has a central role. We consider two firms deciding whether to adopt a common standard. Nonintegrated firms may fail to coordinate if one firm loses. An integrated firm can internalize the externality, but puts insufficient weight on employee benefits. We use our approach to understand why Cisco acquired StrataCom, a provider of new transmission technology. We also analyze delegation. (c) 2010 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology..

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Bibliographic Info

Article provided by MIT Press in its journal Quarterly Journal of Economics.

Volume (Year): 125 (2010)
Issue (Month): 2 (May)
Pages: 483-513

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Handle: RePEc:tpr:qjecon:v:125:y:2010:i:2:p:483-513

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Citations

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Cited by:
  1. Conconi, Paola & Legros, Patrick & Newman, Andrew, 2008. "Trade Liberalization and Organizational Change," CEPR Discussion Papers 7028, C.E.P.R. Discussion Papers.
  2. Simone Moriconi, 2012. "Taxation and Incomplete Contracts," CREA Discussion Paper Series 12-08, Center for Research in Economic Analysis, University of Luxembourg.
  3. Wallis, John Joseph, 2011. "Institutions, organizations, impersonality, and interests: The dynamics of institutions," Journal of Economic Behavior & Organization, Elsevier, vol. 79(1-2), pages 48-64, June.
  4. Oliver D. Hart, 2011. "Noncontractible Investments and Reference Points," NBER Working Papers 16929, National Bureau of Economic Research, Inc.
  5. Hoppe, Eva I. & Schmitz, Patrick W., 2009. "Can Contracts Solve the Hold-Up Problem? Experimental Evidence," CEPR Discussion Papers 7205, C.E.P.R. Discussion Papers.
  6. Patrick Legros & Andrew Newman, 2013. "A Price Theory of Vertical and Lateral Integration," ULB Institutional Repository 2013/141436, ULB -- Universite Libre de Bruxelles.
  7. Altomonte, Carlo & Rungi, Armando, 2013. "Business groups as hierarchies of firms: determinants of vertical integration and performance," Working Paper Series 1554, European Central Bank.
  8. Bohdan Kukharskyy, 2012. "Global Sourcing if Contracts are Reference Points," Working Papers 129, Bavarian Graduate Program in Economics (BGPE).
  9. Erik Lehmann & Thorsten Braun & Sebastian Krispin, 2012. "Entrepreneurial human capital, complementary assets, and takeover probability," The Journal of Technology Transfer, Springer, vol. 37(5), pages 589-608, October.
  10. Bruce Owen, 2011. "Antitrust and Vertical Integration in “New Economy” Industries with Application to Broadband Access," Review of Industrial Organization, Springer, vol. 38(4), pages 363-386, June.
  11. Serfes, Konstantinos, 2013. "A Price Theory of Vertical and Lateral Integration under Two-Sided Productivity Heterogeneity," School of Economics Working Paper Series 2013-6, LeBow College of Business, Drexel University, revised 06 Mar 2014.
  12. Giorgio Zanarone, 2012. "Coase (1937) revisited: Endogenous fiat in firms and markets," International Review of Economics, Springer, vol. 59(2), pages 201-221, July.
  13. Dass, Nishant & Nanda, Vikram & Wang, Qinghai, 2013. "Allocation of decision rights and the investment strategy of mutual funds," Journal of Financial Economics, Elsevier, vol. 110(1), pages 254-277.

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