The Hold-Down Problem and the Boundaries of the Firm: Lesson from a Hidden Action Model with Endogenous Outside Option
This paper offers a rationale for limiting the delegation of (real) authority, which neither relies on insurance arguments nor depends on ownership structure. We analyse a repeated hidden action model in which the actions of a risk neutral agent determine his future outside option. Consequently, the agent can improve his future bargaining position, which gives the principal an incentive to retain sufficient control over the agent’s actions. Using respective one-period contracts, the principal can implement the efficient outcome while “selling the shop” to the agent is sub-optimal. This provides an argument for integration if the boundary of the firm is defined by control rights rather than the entitlement to revenues.
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References listed on IDEAS
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- Fudenberg, Drew & Holmstrom, Bengt & Milgrom, Paul, 1990.
"Short-term contracts and long-term agency relationships,"
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- Ching-to Albert Ma, 1991. "Adverse Selection in Dynamic Moral Hazard," The Quarterly Journal of Economics, Oxford University Press, vol. 106(1), pages 255-275.
- Albert Marcet & Ramon Marimon, 1994. "Recursive contracts," Economics Working Papers 337, Department of Economics and Business, Universitat Pompeu Fabra, revised Oct 1998.
- Albert Marcet & Ramon Marimon, 2011. "Recursive Contracts," Economics Working Papers ECO2011/15, European University Institute.
- Albert Marcet & Ramon Marimon, 2011. "Recursive Contracts," CEP Discussion Papers dp1055, Centre for Economic Performance, LSE.
- Albert Marcet and Ramon Marimon, 2011. "Recursive Contracts," Working Papers 552, Barcelona Graduate School of Economics.
- Marcet, A. & Marimon, R., 1998. "Recursive Contracts," Economics Working Papers eco98/37, European University Institute.
- Fernandes, Ana & Phelan, Christopher, 2000. "A Recursive Formulation for Repeated Agency with History Dependence," Journal of Economic Theory, Elsevier, vol. 91(2), pages 223-247, April.
- Ana Fernandes & Christopher Phelan, 1999. "A recursive formulation for repeated agency with history dependence," Staff Report 259, Federal Reserve Bank of Minneapolis.
- Gene M. Grossman & Elhanan Helpman, 2002. "Integration versus Outsourcing in Industry Equilibrium," The Quarterly Journal of Economics, Oxford University Press, vol. 117(1), pages 85-120. Full references (including those not matched with items on IDEAS)
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