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

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  • Yusuke Mori

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

Abstract

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).

Suggested Citation

  • Yusuke Mori, 2013. "A Formal Theory of Firm Boundaries: A Trade-Off between Rent Seeking and Bargaining Costs," Discussion Paper Series DP2013-20, Research Institute for Economics & Business Administration, Kobe University.
  • Handle: RePEc:kob:dpaper:dp2013-20
    as

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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
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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. Hart, Oliver & Moore, John, 1990. "Property Rights and the Nature of the Firm," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1119-1158, December.
    3. 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.
    4. Kambe, Shinsuke, 1999. "Bargaining with Imperfect Commitment," Games and Economic Behavior, Elsevier, vol. 28(2), pages 217-237, August.
    5. Eric Van den Steen, 2010. "Interpersonal Authority in a Theory of the Firm," American Economic Review, American Economic Association, vol. 100(1), pages 466-490, March.
    6. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817.
    7. 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.
    8. Oliver Hart, 2009. "Hold-up, Asset Ownership, and Reference Points," The Quarterly Journal of Economics, Oxford University Press, vol. 124(1), pages 267-300.
    9. repec:mes:jeciss:v:30:y:1996:i:4:p:1212-1216 is not listed on IDEAS
    10. Francine Lafontaine & Margaret Slade, 2007. "Vertical Integration and Firm Boundaries: The Evidence," Journal of Economic Literature, American Economic Association, vol. 45(3), pages 629-685, September.
    11. Jihong Lee & Qingmin Liu, 2013. "Gambling Reputation: Repeated Bargaining With Outside Options," Econometrica, Econometric Society, vol. 81(4), pages 1601-1672, July.
    12. Michael Powell, 2015. "An Influence-Cost Model of Organizational Practices and Firm Boundaries," Journal of Law, Economics, and Organization, Oxford University Press, vol. 31(suppl_1), pages 104-142.
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