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Agency Costs and the Limits of Integration

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  • Trond E. Olsen

Abstract

In this article I identify a type of integration cost that is associated with agency relations within the firm. This cost arises when the firm's principal cannot fully commit to long-term contracts with the firm's agents, and these agents have private information. In the model, integration can lead to value enhancements through the realization of complementarity gains. But this will also lead to larger rents, which is costly for the principal. I show that this type of cost may be sufficiently large to act as an effective limit for integrations that are otherwise profitable.

Suggested Citation

  • Trond E. Olsen, 1996. "Agency Costs and the Limits of Integration," RAND Journal of Economics, The RAND Corporation, vol. 27(3), pages 479-501, Autumn.
  • Handle: RePEc:rje:randje:v:27:y:1996:i:autumn:p:479-501
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    Cited by:

    1. Bao, T. & Wang, Y., 2009. "Incomplete Contract and Divisional Structures," CeNDEF Working Papers 09-16, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
    2. Dongsoo Shin & Roland Strausz, 2014. "Delegation and dynamic incentives," RAND Journal of Economics, RAND Corporation, vol. 45(3), pages 495-520, September.
    3. Faure-Grimaud, A. & Reiche, S., 2006. "Dynamic yardstick mechanisms," Games and Economic Behavior, Elsevier, vol. 54(2), pages 316-335, February.
    4. Will, Heide C. U., 1998. "Management Style in Decision Making: Top Down or Bottom Up?," Discussion Paper Serie A 577, University of Bonn, Germany.
    5. Riyanto, Yohanes E., 2000. "Delegation of authority, managerial initiatives, and the design of divisional structure," CCSO Working Papers 200011, University of Groningen, CCSO Centre for Economic Research.
    6. Askildsen, Jan Erik & Holmås, Tor Helge & Kaarboe, Oddvar, 2010. "Prioritization and patients' rights: Analysing the effect of a reform in the Norwegian hospital sector," Social Science & Medicine, Elsevier, vol. 70(2), pages 199-208, January.
    7. Sherrill Shaffer, 1997. "Network diseconomies and optimal structure," Working Papers 97-19, Federal Reserve Bank of Philadelphia.
    8. repec:dgr:rugccs:200011 is not listed on IDEAS
    9. Faure-Grimaud, Antoine & Reiche, Sonje, 2003. "Dynamic yardstick regulation," LSE Research Online Documents on Economics 19319, London School of Economics and Political Science, LSE Library.

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