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A Formal Theory of Firm Boundaries: A Trade-Off between Rent Seeking and Bargaining Costs

  • Yusuke Mori

    (Research Fellow of Japan Society for the Promotion of Science, Institute of Social Science, The University of Tokyo, JAPAN)

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    We develop a theory of firm boundaries in the spirit of transaction cost analysis, in which trading parties engage in ex post value split. We show that ex post inefficient bargaining under non-integration creates a trade-off between rent seeking and bargaining costs: while non-integration incurs lower rent-seeking costs than integration, it suffers from bargaining delay and breakdown, which never occur under integration. This result explains why rent-seeking activities within firms are likely to be more costly than those between firms, and offers a formal justification for the "costs of bureaucracy" in Williamson (1985).

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    File URL: http://www.rieb.kobe-u.ac.jp/academic/ra/dp/English/DP2013-20.pdf
    File Function: First version, 2013
    Download Restriction: no

    Paper provided by Research Institute for Economics & Business Administration, Kobe University in its series Discussion Paper Series with number DP2013-20.

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    Length: 45 pages
    Date of creation: Jun 2013
    Date of revision:
    Handle: RePEc:kob:dpaper:dp2013-20
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    1. Eric Van den Steen, 2010. "Interpersonal Authority in a Theory of the Firm," American Economic Review, American Economic Association, vol. 100(1), pages 466-90, March.
    2. Jihong Lee & Qingmin Liu, 2013. "Gambling Reputation: Repeated Bargaining With Outside Options," Econometrica, Econometric Society, vol. 81(4), pages 1601-1672, 07.
    3. Oliver Hart & John Moore, 1988. "Property Rights and the Nature of the Firm," Working papers 495, Massachusetts Institute of Technology (MIT), Department of Economics.
    4. Kambe, Shinsuke, 1999. "Bargaining with Imperfect Commitment," Games and Economic Behavior, Elsevier, vol. 28(2), pages 217-237, August.
    5. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817, March.
    6. Lafontaine, Francine & Slade, Margaret, 2007. "Vertical Integration and Firm Boundaries : The Evidence," The Warwick Economics Research Paper Series (TWERPS) 799, University of Warwick, Department of Economics.
    7. 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.
    8. Alp E. Atakan & Mehmet Ekmekci, 2014. "Bargaining and Reputation in Search Markets," Review of Economic Studies, Oxford University Press, vol. 81(1), pages 1-29.
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