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Governance of Adjustments

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Author Info
Wernerfelt, Birger

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Abstract

The article proposes a research program to compare game forms in terms of their ability to govern ex post adjustments to ex ante contracts. The comparisons can be based on direct implementation-costs or the extent to which desirable adjustments are not implemented. In several examples of the program, we compare three game forms: Negotiation over each adjustment, ex ante price lists, and implicit contracts leaving the stipulation of adjustments to one player. If the latter game form is defined as an employment relationship, the theory of the firm becomes a special case of the program. The article starts with a discussion of the nature and magnitude of adjustment-costs, followed by an exposition of four examples. We then discuss the role of asset ownership, review some empirical evidence, and look at broader implications.

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File URL: http://hdl.handle.net/1721.1/1836
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Publisher Info
Paper provided by Massachusetts Institute of Technology (MIT), Sloan School of Management in its series Working papers with number 4412-03.

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Date of creation: 14 Mar 2003
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Handle: RePEc:mit:sloanp:1836

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Postal: MASSACHUSETTS INSTITUTE OF TECHNOLOGY (MIT), SLOAN SCHOOL OF MANAGEMENT, 50 MEMORIAL DRIVE CAMBRIDGE MASSACHUSETTS 02142 USA
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Postal: MASSACHUSETTS INSTITUTE OF TECHNOLOGY (MIT), SLOAN SCHOOL OF MANAGEMENT, 50 MEMORIAL DRIVE CAMBRIDGE MASSACHUSETTS 02142 USA

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Related research
Keywords: Theory of the Firm; Employment Relationship; Contracts;

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References listed on IDEAS
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.:
  1. Oliver Hart & John Moore, 1999. "On the Design of Hierarchies: Coordination Versus Specialization," NBER Working Papers 7388, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Holmstrom, Bengt & Milgrom, Paul, 1987. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Econometrica, Econometric Society, vol. 55(2), pages 303-28, March. [Downloadable!] (restricted)
    Other versions:
  3. Raghuram G. Rajan & Luigi Zingales, 1998. "Power In A Theory Of The Firm," The Quarterly Journal of Economics, MIT Press, vol. 113(2), pages 387-432, May. [Downloadable!] (restricted)
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  4. Steven Tadelis, 2002. "Complexity, Flexibility, and the Make-or-Buy Decision," American Economic Review, American Economic Association, vol. 92(2), pages 433-437, May. [Downloadable!]
  5. Raghuram G. Rajan & Luigi Zingales, 2001. "The Firm As A Dedicated Hierarchy: A Theory Of The Origins And Growth Of Firms," The Quarterly Journal of Economics, MIT Press, vol. 116(3), pages 805-851, August. [Downloadable!] (restricted)
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  6. Hart, Oliver & Moore, John, 1990. "Property Rights and the Nature of the Firm," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1119-58, December. [Downloadable!] (restricted)
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  7. Bajari, Patrick & Tadelis, Steven, 2001. "Incentives versus Transaction Costs: A Theory of Procurement Contracts," RAND Journal of Economics, The RAND Corporation, vol. 32(3), pages 387-407, Autumn.
  8. Francine Lafontaine & Scott E. Masten, 2002. "Contracting in the Absence of Specific Investments and Moral Hazard: Understanding Carrier-Driver Relations in U.S. Trucking," NBER Working Papers 8859, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Holmstrom, Bengt & Milgrom, Paul, 1994. "The Firm as an Incentive System," American Economic Review, American Economic Association, vol. 84(4), pages 972-91, September. [Downloadable!] (restricted)
  10. Myerson, Roger B. & Satterthwaite, Mark A., 1983. "Efficient mechanisms for bilateral trading," Journal of Economic Theory, Elsevier, vol. 29(2), pages 265-281, April. [Downloadable!] (restricted)
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  11. Geanakoplos, John & Milgrom, Paul, 1991. "A theory of hierarchies based on limited managerial attention," Journal of the Japanese and International Economies, Elsevier, vol. 5(3), pages 205-225, September. [Downloadable!] (restricted)
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  12. Wernerfelt, Birger, 1997. "On the Nature and Scope of the Firm: An Adjustment-Cost Theory," Journal of Business, University of Chicago Press, vol. 70(4), pages 489-514, October. [Downloadable!] (restricted)
  13. Duncan I. Simester & Birger Wernerfelt, 2005. "Determinants of Asset Ownership: A Study of the Carpentry Trade," The Review of Economics and Statistics, MIT Press, vol. 87(1), pages 50-58, October. [Downloadable!] (restricted)
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Cited by:
(explanations, 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.)

  1. Ariño, Africa & Reuer, Jeffrey J., 2004. "Alliance contractual design," IESE Research Papers D/572, IESE Business School. [Downloadable!]
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