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A Formal Theory of Firm Boundaries: A Trade-Off between Rent Seeking and Bargaining Costs

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  • Yusuke Mori

    (Research Fellow of Japan Society for the Promotion of Science, Institute of Social Science, The University of Tokyo, JAPAN)

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    Abstract

    We develop a theory of firm boundaries in the spirit of transaction cost analysis, in which trading parties engage in ex post value split. We show that ex post inefficient bargaining under non-integration creates a trade-off between rent seeking and bargaining costs: while non-integration incurs lower rent-seeking costs than integration, it suffers from bargaining delay and breakdown, which never occur under integration. This result explains why rent-seeking activities within firms are likely to be more costly than those between firms, and offers a formal justification for the "costs of bureaucracy" in Williamson (1985).

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    File URL: http://www.rieb.kobe-u.ac.jp/academic/ra/dp/English/DP2013-20.pdf
    File Function: First version, 2013
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    Bibliographic Info

    Paper provided by Research Institute for Economics & Business Administration, Kobe University in its series Discussion Paper Series with number DP2013-20.

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    Length: 45 pages
    Date of creation: Jun 2013
    Date of revision:
    Handle: RePEc:kob:dpaper:dp2013-20

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    1. 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.
    2. Jihong Lee & Qingmin Liu, 2013. "Gambling Reputation: Repeated Bargaining With Outside Options," Econometrica, Econometric Society, vol. 81(4), pages 1601-1672, 07.
    3. Oliver Hart & John Moore, 1988. "Property Rights and the Nature of the Firm," Working papers 495, Massachusetts Institute of Technology (MIT), Department of Economics.
    4. Alp Atakan & Mehmet Ekmekci, 2010. "Bargaining and Reputation in Search Markets," Discussion Papers 1508, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    5. Kambe, Shinsuke, 1999. "Bargaining with Imperfect Commitment," Games and Economic Behavior, Elsevier, vol. 28(2), pages 217-237, August.
    6. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817.
    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.
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