A Formal Theory of Firm Boundaries: A Trade-Off between Rent Seeking and Bargaining Costs
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).
|Date of creation:||Jun 2013|
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- Hart, Oliver D. & Moore, John, 1990. "Property Rights and the Nature of the Firm," Scholarly Articles 3448675, Harvard University Department of Economics.
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- 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.
- Oliver Hart, 2009. "Hold-up, Asset Ownership, and Reference Points," The Quarterly Journal of Economics, Oxford University Press, vol. 124(1), pages 267-300.
- 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.
- 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.
- Jihong Lee & Qingmin Liu, 2013. "Gambling Reputation: Repeated Bargaining With Outside Options," Econometrica, Econometric Society, vol. 81(4), pages 1601-1672, July.
- 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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