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The Boundaries of the Firms as Information Barriers

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  • Eric Chou
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    Abstract

    Most existing theories of the firms define a firm as a collection of physical assets, and hence can not explain the firm from a human-asset perspective, which is of particular importance for understanding human-capital intensive firms. To fill in the gap, this paper proposes an alternative definition -- a firm is a group of people who work in a very close way so that outsiders cannot clearly distinguish one group member from another. By this definition, the boundaries of the firm matter because they can alter investment specificity and hence alleviate or aggravate the hold-up problem. Specifically, when there is substantial investment externalities integration is more efficient, and conversely separation is more efficient when investment externalities are small. This result is obtained under both Nash and alternating-offer bargaining. The effect of `relational contracts' (Baker, Gibbons and Murphy [2002]) is also examined to show that the newly defined organization structures matter even when relational contracts can be signed

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    Bibliographic Info

    Paper provided by Econometric Society in its series Econometric Society 2004 North American Summer Meetings with number 313.

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    Date of creation: 11 Aug 2004
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    Handle: RePEc:ecm:nasm04:313

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    Keywords: Boundaries of the firms; Information Barriers;

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    1. Raghuram G. Rajan & Luigi Zingales, 2000. "The Firm as a Dedicated Hierarchy: A Theory of the Origin and Growth of Firms," NBER Working Papers 7546, National Bureau of Economic Research, Inc.
    2. Hart, Oliver D. & Moore, John, 1990. "Property Rights and the Nature of the Firm," Scholarly Articles 3448675, Harvard University Department of Economics.
    3. Jonathan Levin, 2002. "A Theory of Partnerships," Theory workshop papers, UCLA Department of Economics 505798000000000002, UCLA Department of Economics.
    4. Rajan, Raghuram G & Zingales, Luigi, 1998. "Power in a Theory of the Firm," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1777, C.E.P.R. Discussion Papers.
    5. Dewatripont, Mathias & Jewitt, Ian & Tirole, Jean, 1999. "The Economics of Career Concerns, Part I: Comparing Information Structures," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 66(1), pages 183-98, January.
    6. Maxim Engers & Joshua S. Gans & Simon Grant & Stephen King, 1999. "First-Author Conditions," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 107(4), pages 859-883, August.
    7. Steven Tadelis, 1999. "What's in a Name? Reputation as a Tradeable Asset," American Economic Review, American Economic Association, American Economic Association, vol. 89(3), pages 548-563, June.
    8. David De Meza & Ben Lockwood, 1998. "Does Asset Ownership Always Motivate Managers? Outside Options And The Property Rights Theory Of The Firm," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 113(2), pages 361-386, May.
    9. Chiu, Y Stephen, 1998. "Noncooperative Bargaining, Hostages, and Optimal Asset Ownership," American Economic Review, American Economic Association, American Economic Association, vol. 88(4), pages 882-901, September.
    10. Holmstrom, Bengt, 1999. "The Firm as a Subeconomy," Journal of Law, Economics and Organization, Oxford University Press, Oxford University Press, vol. 15(1), pages 74-102, April.
    11. George Baker & Robert Gibbons & Kevin J. Murphy, 2002. "Relational Contracts And The Theory Of The Firm," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 117(1), pages 39-84, February.
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