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A bargaining theory of the firm

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  • Volker Britz
  • P. Herings
  • Arkadi Predtetchinski

Abstract

Suppose that a firm has several owners and that the future is uncertain in the sense that one out of many different states of nature will realize tomorrow. An owner’s time preference and risk attitude will determine the importance he places on payoffs in the different states. It is a well-known problem in the literature that under incomplete asset markets, a conflict about the firm’s objective function tends to arise among its owners. In this paper, we take a new approach to this problem, which is based on non-cooperative bargaining. The owners of the firm play a bargaining game in order to choose the firm’s production plan and a scheme of transfers which are payable before the uncertainty about the future state of nature is resolved. We analyze the resulting firm decision in the limit of subgame-perfect equilibria in stationary strategies. Given the distribution of bargaining power, we obtain a unique prediction for a production plan and a transfer scheme. When markets are complete, the production plan chosen corresponds to the profit-maximizing production plan as in the Arrow–Debreu model. Contrary to that model, owners typically do use transfers to redistribute profits. When markets are incomplete, the production plan chosen is almost always different from the one in a transfer-free Drèze (pseudo-)equilibrium and again owners use transfers to redistribute profits. Nevertheless, our results do support the Drèze criterion as the appropriate objective function of the firm. Copyright Springer-Verlag Berlin Heidelberg 2013

Suggested Citation

  • Volker Britz & P. Herings & Arkadi Predtetchinski, 2013. "A bargaining theory of the firm," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 54(1), pages 45-75, September.
  • Handle: RePEc:spr:joecth:v:54:y:2013:i:1:p:45-75
    DOI: 10.1007/s00199-012-0721-3
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    References listed on IDEAS

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    Cited by:

    1. Zierhut, Michael, 2019. "Nonexistence of constrained efficient production plans," Journal of Mathematical Economics, Elsevier, vol. 83(C), pages 127-136.

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    More about this item

    Keywords

    Strategic bargaining; Nash bargaining solution; Incomplete markets; Stock market equilibrium; Objective function of the firm; Profit-maximization; C78; D52;
    All these keywords.

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets

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