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Experience Benefits and Firm Organization


  • Ingela Alger

    (Economics Department, Carleton University)

  • Ching-to Albert Ma

    () (Economics Department, Boston University)

  • Regis Renault

    () (Universite de Cergy-Pontoise, THEMA)


A principal requires a manager for production. He can use an internal manager, or contracts with an external manger. In each case, the manager obtains experience benefits from production. When the principal uses an internal manager, both parties share cost information. When the principal contracts with an external manager, only the external manager acquires cost information. The internal manager has limited access to the credit market; he has a minimum income constraint. The external manager has adequate access and has no minimum income constraint. The principal faces a tradeoff. Hiring an internal manager eliminates asymmetric information, but extracting experience rent is more difficult due to the minimum income constraint. Hiring an external manager means giving up information rent, but extracting experience rent is feasible. Whether the principal uses an internal or an external manager depends on the tightness of the minimum income constraint and the magnitude of the experience benefit. The principal's optimal choice may not be socially efficient.

Suggested Citation

  • Ingela Alger & Ching-to Albert Ma & Regis Renault, "undated". "Experience Benefits and Firm Organization," Boston University - Department of Economics - Working Papers Series wp2009-007, Boston University - Department of Economics.
  • Handle: RePEc:bos:wpaper:wp2009-007

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    References listed on IDEAS

    1. Anke S. Kessler & Christoph Lülfesmann, 2006. "The Theory of Human Capital Revisited: on the Interaction of General and Specific Investments," Economic Journal, Royal Economic Society, vol. 116(514), pages 903-923, October.
    2. Alger Ingela & Ma Ching-to Albert & Renault Regis, 2012. "Experience Benefits and Firm Organization," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 12(1), pages 1-35, September.
    3. Evans, David S & Jovanovic, Boyan, 1989. "An Estimated Model of Entrepreneurial Choice under Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 808-827, August.
    4. Jacques Crémer & Luis Garicano & Andrea Prat, 2007. "Language and the Theory of the Firm," The Quarterly Journal of Economics, Oxford University Press, vol. 122(1), pages 373-407.
    5. Sherwin Rosen, 1972. "Learning by Experience as Joint Production," The Quarterly Journal of Economics, Oxford University Press, vol. 86(3), pages 366-382.
    6. Gibbons, Robert & Murphy, Kevin J, 1992. "Optimal Incentive Contracts in the Presence of Career Concerns: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 100(3), pages 468-505, June.
    7. Hubbard, Thomas N, 2001. "Contractual Form and Market Thickness in Trucking," RAND Journal of Economics, The RAND Corporation, vol. 32(2), pages 369-386, Summer.
    8. Gonzalez-Diaz, Manuel & Arrunada, Benito & Fernandez, Alberto, 2000. "Causes of subcontracting: evidence from panel data on construction firms," Journal of Economic Behavior & Organization, Elsevier, vol. 42(2), pages 167-187, June.
    9. repec:dau:papers:123456789/12408 is not listed on IDEAS
    10. Rosés, Joan R., 2005. "Subcontracting and vertical integration in the Spanish cotton industry," IFCS - Working Papers in Economic History.WH wh051302, Universidad Carlos III de Madrid. Instituto Figuerola.
    11. Masten, Scott E, 1988. "A Legal Basis for the Firm," Journal of Law, Economics, and Organization, Oxford University Press, vol. 4(1), pages 181-198, Spring.
    12. Masten, Scott E. & Meehan, James Jr. & Snyder, Edward A., 1989. "Vertical integration in the U.S. auto industry : A note on the influence of transaction specific assets," Journal of Economic Behavior & Organization, Elsevier, vol. 12(2), pages 265-273, October.
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    Cited by:

    1. Nicolas Klein, 2009. "Free-Riding And Delegation In Research Teams," 2009 Meeting Papers 253, Society for Economic Dynamics.
    2. Alger Ingela & Ma Ching-to Albert & Renault Regis, 2012. "Experience Benefits and Firm Organization," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 12(1), pages 1-35, September.
    3. repec:eee:reensy:v:148:y:2016:i:c:p:96-108 is not listed on IDEAS

    More about this item


    Theory of the firm; job experience rent; informational rents;

    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


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