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Experience Benefits and Firm Organization

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A principal requires a manager for production. He can use an internal manager, or contracts with an external manger. In each case, the manager obtains experience benefits from production. When the principal uses an internal manager, both parties share cost information. When the principal contracts with an external manager, only the external manager acquires cost information. The internal manager has limited access to the credit market; he has a minimum income constraint. The external manager has adequate access and has no minimum income constraint. The principal faces a tradeo. Hiring an internal manager eliminates asymmetric information, but extracting experience rent is more difficult due to the minimum income constraint. Hiring an external manager means giving up information rent, but extracting experience rent is feasible. Whether the principal uses an internal or an external manager depends on the tightness of the minimum income constraint and the magnitude of the experience benefit. The principal's optimal choice may not be socially efficient.

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Bibliographic Info

Paper provided by Carleton University, Department of Economics in its series Carleton Economic Papers with number 09-03.

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Length: 40 pages
Date of creation: 13 Jul 2009
Date of revision:
Publication status: Published: Carleton Economic Papers
Handle: RePEc:car:carecp:09-03

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Keywords: Theory of the firm; job experience rent; informational rents.;

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  1. Yoram Ben-Porath, 1967. "The Production of Human Capital and the Life Cycle of Earnings," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 75, pages 352.
  2. Holmstrom, Bengt, 1999. "Managerial Incentive Problems: A Dynamic Perspective," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 66(1), pages 169-82, January.
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  4. Masten, Scott E. & Meehan, James Jr. & Snyder, Edward A., 1989. "Vertical integration in the U.S. auto industry : A note on the influence of transaction specific assets," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 12(2), pages 265-273, October.
  5. Kessler, Anke & Lülfesmann, Christoph, 2000. "The Theory of Human Capital Revisited: On the Interaction of General and Specific Investments," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2533, C.E.P.R. Discussion Papers.
  6. Joan Ramon Rosés, 2005. "Subcontracting and vertical integration in the Spanish cotton industry," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 816, Department of Economics and Business, Universitat Pompeu Fabra.
  7. Gary S. Becker, 1962. "Investment in Human Capital: A Theoretical Analysis," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 70, pages 9.
  8. Ingela Alger & Regis Renault, 2003. "Screening Ethics when Honest Agents Keep their Word," Boston College Working Papers in Economics, Boston College Department of Economics 562, Boston College Department of Economics, revised 09 Nov 2004.
  9. Masten, Scott E, 1988. "A Legal Basis for the Firm," Journal of Law, Economics and Organization, Oxford University Press, Oxford University Press, vol. 4(1), pages 181-98, Spring.
  10. Hubbard, Thomas N, 2001. "Contractual Form and Market Thickness in Trucking," RAND Journal of Economics, The RAND Corporation, vol. 32(2), pages 369-86, Summer.
  11. Jacques Cremer & Luis Garicano & Andrea Prat, 2006. "Language and the Theory of the Firm," Levine's Bibliography 784828000000000373, UCLA Department of Economics.
  12. Rosen, Sherwin, 1972. "Learning by Experience as Joint Production," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 86(3), pages 366-82, August.
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