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Governance of Adjustments

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  • Wernerfelt, Birger

Abstract

The article proposes a research program to compare game forms in terms of their ability to govern ex post adjustments to ex ante contracts. The comparisons can be based on direct implementation-costs or the extent to which desirable adjustments are not implemented. In several examples of the program, we compare three game forms: Negotiation over each adjustment, ex ante price lists, and implicit contracts leaving the stipulation of adjustments to one player. If the latter game form is defined as an employment relationship, the theory of the firm becomes a special case of the program. The article starts with a discussion of the nature and magnitude of adjustment-costs, followed by an exposition of four examples. We then discuss the role of asset ownership, review some empirical evidence, and look at broader implications.

Suggested Citation

  • Wernerfelt, Birger, 2003. "Governance of Adjustments," Working papers 4412-03, Massachusetts Institute of Technology (MIT), Sloan School of Management.
  • Handle: RePEc:mit:sloanp:1836
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    File URL: http://hdl.handle.net/1721.1/1836
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    References listed on IDEAS

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    9. Duncan I. Simester & Birger Wernerfelt, 2005. "Determinants of Asset Ownership: A Study of the Carpentry Trade," The Review of Economics and Statistics, MIT Press, vol. 87(1), pages 50-58, February.
    10. Wernerfelt, Birger, 1997. "On the Nature and Scope of the Firm: An Adjustment-Cost Theory," The Journal of Business, University of Chicago Press, vol. 70(4), pages 489-514, October.
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    Cited by:

    1. AriƱo, Africa & Reuer, Jeffrey J., 2004. "Alliance contractual design," IESE Research Papers D/572, IESE Business School.
    2. Haizhi Wang & Robert Wuebker & Shu Han & Michael Ensley, 2012. "Strategic alliances by venture capital backed firms: an empirical examination," Small Business Economics, Springer, vol. 38(2), pages 179-196, February.

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