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The Boundaries of the Firms as Information Barriers

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  • Eric Chou

Abstract

Most existing theories of the firms define a firm as a collection of physical assets, and hence can not explain the firm from a human-asset perspective, which is of particular importance for understanding human-capital intensive firms. To fill in the gap, this paper proposes an alternative definition -- a firm is a group of people who work in a very close way so that outsiders cannot clearly distinguish one group member from another. By this definition, the boundaries of the firm matter because they can alter investment specificity and hence alleviate or aggravate the hold-up problem. Specifically, when there is substantial investment externalities integration is more efficient, and conversely separation is more efficient when investment externalities are small. This result is obtained under both Nash and alternating-offer bargaining. The effect of `relational contracts' (Baker, Gibbons and Murphy [2002]) is also examined to show that the newly defined organization structures matter even when relational contracts can be signed

Suggested Citation

  • Eric Chou, 2004. "The Boundaries of the Firms as Information Barriers," Econometric Society 2004 North American Summer Meetings 313, Econometric Society.
  • Handle: RePEc:ecm:nasm04:313
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    References listed on IDEAS

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    1. George Baker & Robert Gibbons & Kevin J. Murphy, 2002. "Relational Contracts and the Theory of the Firm," The Quarterly Journal of Economics, Oxford University Press, vol. 117(1), pages 39-84.
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    6. 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, Oxford University Press, vol. 116(3), pages 805-851.
    7. David de Meza & Ben Lockwood, 1998. "Does Asset Ownership Always Motivate Managers? Outside Options and the Property Rights Theory of the Firm," The Quarterly Journal of Economics, Oxford University Press, vol. 113(2), pages 361-386.
    8. Maxim Engers & Joshua S. Gans & Simon Grant & Stephen King, 1999. "First-Author Conditions," Journal of Political Economy, University of Chicago Press, vol. 107(4), pages 859-883, August.
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    10. Holmstrom, Bengt, 1999. "The Firm as a Subeconomy," Journal of Law, Economics, and Organization, Oxford University Press, vol. 15(1), pages 74-102, April.
    11. Jonathan Levin, 2002. "A Theory of Partnerships," Theory workshop papers 505798000000000002, UCLA Department of Economics.
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    More about this item

    Keywords

    Boundaries of the firms; Information Barriers;

    JEL classification:

    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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