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How Can Integration Reduce Inefficiencies Due to Ex Post Adaptation?

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  • Mori, Yusuke

Abstract

How can integrated firms immediately settle ex post adaptations to unanticipated disturbances? While this question is crucial to the understanding of transaction cost economics (TCE), TCE has not provided any formal answer. This paper develops a model that explores this question by employing three behavioral assumptions: reference-dependent preference, self-serving bias, and shading. We present two reasons why integration can avoid costly renegotiations and realize immediate adaptations; these stem from the fact that while nonintegrated parties have to engage in negotiations for the adaptations, integrated firms can implement these by fiat. First, punishments for rejection of an order under integration are severer than those for rejection of an offer under non-integration. Second, under integration, the utility improvement for a subordinate from rejecting an order is not sufficient to offset the loss from a severe punishment. Furthermore, we point out a trade-off between immediate agreement and the aggregate sense of loss.

Suggested Citation

  • Mori, Yusuke, 2012. "How Can Integration Reduce Inefficiencies Due to Ex Post Adaptation?," Working Paper Series 142, Center for Japanese Business Studies (HJBS), Graduate School of Commerce and Management Hitotsubashi University.
  • Handle: RePEc:hit:hjbswp:142
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    File URL: http://hermes-ir.lib.hit-u.ac.jp/rs/bitstream/10086/22946/1/070hibsWP_142.pdf
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    References listed on IDEAS

    as
    1. Oliver Hart & John Moore, 2008. "Contracts as Reference Points," The Quarterly Journal of Economics, Oxford University Press, vol. 123(1), pages 1-48.
    2. Kirk Monteverde & David J. Teece, 1982. "Supplier Switching Costs and Vertical Integration in the Automobile Industry," Bell Journal of Economics, The RAND Corporation, vol. 13(1), pages 206-213, Spring.
    3. Botond Kőszegi & Matthew Rabin, 2006. "A Model of Reference-Dependent Preferences," The Quarterly Journal of Economics, Oxford University Press, vol. 121(4), pages 1133-1165.
    4. Andrea Gallice, 2009. "Self-serving biased reference points," Department of Economic Policy, Finance and Development (DEPFID) University of Siena 0909, Department of Economic Policy, Finance and Development (DEPFID), University of Siena.
    5. Oliver Hart, 2009. "Hold-up, Asset Ownership, and Reference Points," The Quarterly Journal of Economics, Oxford University Press, vol. 124(1), pages 267-300.
    6. repec:mes:jeciss:v:30:y:1996:i:4:p:1212-1216 is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Reference-dependent preference; self-serving bias; contracts as reference points; transaction cost; ex post adaptation;

    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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