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A Formal Behavioral Model of Firm Boundaries: Why Does Authority Relation Mitigate Ex Post Adaptation Problems?

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  • Yusuke Mori
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    Abstract

    We explore why authority within firms helps trading parties immediately settle ex post adaptation problems despite the possibility of a subordinate's disobedience to the orders of his boss. By employing three crucial behavioral assumptions (reference-dependent preference, self-serving bias, and shading), we point out that the choice of governance structure affects trading parties' expectations about outcome of ex post adaptations and show that a subordinate is likely to obey orders of his boss because he is expected to do so. Nevertheless, our study also points out that such a positive aspect of authority comes with subordinate's psychological disutility.

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    File URL: http://www.iser.osaka-u.ac.jp/library/dp/2013/DP0863.pdf
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    Paper provided by Institute of Social and Economic Research, Osaka University in its series ISER Discussion Paper with number 0863.

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    Date of creation: Jan 2013
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    Handle: RePEc:dpr:wpaper:0863

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    1. Oliver Hart & John Moore, 1988. "Property Rights and the Nature of the Firm," Working papers 495, Massachusetts Institute of Technology (MIT), Department of Economics.
    2. Gary E Bolton & Rami Zuwick, 2010. "Anonymity versus punishments in ultimatum bargaining," Levine's Working Paper Archive 826, David K. Levine.
    3. Andrea Gallice, 2009. "Self-serving biased reference points," Department of Economic Policy, Finance and Development (DEPFID) University of Siena 0909, Department of Economic Policy, Finance and Development (DEPFID), University of Siena.
    4. W. Bentley MacLeod, 2007. "Can Contract Theory Explain Social Preferences?," American Economic Review, American Economic Association, vol. 97(2), pages 187-192, May.
    5. Eric Van den Steen, 2010. "Interpersonal Authority in a Theory of the Firm," American Economic Review, American Economic Association, vol. 100(1), pages 466-90, March.
    6. Herweg, Fabian & Schmidt, Klaus, 2013. "Loss Aversion and Ex Post Inefficient Renegotiation," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79772, Verein für Socialpolitik / German Economic Association.
    7. Kirk Monteverde & David J. Teece, 1982. "Supplier Switching Costs and Vertical Integration in the Automobile Industry," Bell Journal of Economics, The RAND Corporation, vol. 13(1), pages 206-213, Spring.
    8. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817, September.
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