How Can Integration Reduce Inefficiencies Due to Ex Post Adaptation?
AbstractHow can integrated firms immediately settle ex post adaptations to unanticipated disturbances? While this question is crucial to the understanding of transaction cost economics (TCE), TCE has not provided any formal answer. This paper develops a model that explores this question by employing three behavioral assumptions: reference-dependent preference, self-serving bias, and shading. We present two reasons why integration can avoid costly renegotiations and realize immediate adaptations; these stem from the fact that while nonintegrated parties have to engage in negotiations for the adaptations, integrated firms can implement these by fiat. First, punishments for rejection of an order under integration are severer than those for rejection of an offer under non-integration. Second, under integration, the utility improvement for a subordinate from rejecting an order is not sufficient to offset the loss from a severe punishment. Furthermore, we point out a trade-off between immediate agreement and the aggregate sense of loss.
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Bibliographic InfoPaper provided by Center for Japanese Business Studies (HJBS), Graduate School of Commerce and Management Hitotsubashi University in its series Working Paper Series with number 142.
Length: 34 p.
Date of creation: Apr 2012
Date of revision:
Reference-dependent preference; self-serving bias; contracts as reference points; transaction cost; ex post adaptation;
Find related papers by JEL classification:
- 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-2012-05-08 (All new papers)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- 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.
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