Experience Benefits and Firm Organization
AbstractA 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 InfoPaper provided by Carleton University, Department of Economics in its series Carleton Economic Papers with number 09-03.
Length: 40 pages
Date of creation: 13 Jul 2009
Date of revision:
Publication status: Published: Carleton Economic Papers
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Other versions of this item:
- Ingela Alger & Ching-to Albert Ma & Regis Renault, . "Experience Benefits and Firm Organization," Boston University - Department of Economics - Working Papers Series wp2009-007, Boston University - Department of Economics.
- Renault, Régis & Ma, Ching-to Albert & Alger, Ingela, 2012. "Experience Benefits and Firm Organization," Economics Papers from University Paris Dauphine 123456789/12408, Paris Dauphine University.
- Ching-to Albert MA & Ingela Alger & Regis Renault, 2012. "Experience Benefits and Firm Organization," Boston University - Department of Economics - Working Papers Series WP2012-007, Boston University - Department of Economics.
- D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
- L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-09-19 (All new papers)
- NEP-BEC-2009-09-19 (Business Economics)
- NEP-CTA-2009-09-19 (Contract Theory & Applications)
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