A Theory of the Firm based on Partner Displacement / Thomas F. Hellmann, Veikko Thiele.

Format:

Book

Author/Creator:

Hellmann, Thomas F.

Contributor:

National Bureau of Economic Research.

Thiele, Veikko.

Series:

Working Paper Series (National Bureau of Economic Research) no. w18495.

NBER working paper series no. w18495

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2012.

Summary:

We develop a new theory of the firm where asset owners sometimes want to change partners ex-post. The model identifies a fundamental trade-off between (i) a "displacement externality" under non-integration, where a partner leaves a relationship even though the benefit is worth less than the loss to the displaced partner, and (ii), a "retention externality" under integration, where a partner inefficiently retains the other. Renegotiation cannot eliminate these inefficiencies when agents are wealth constrained. When there is more asset specificity, displacement externalities matter more and retention externality less, so that integration becomes more attractive. Our model also predicts that integration always provides stronger incentives for specific investments, and that wealthy owners actually want to commit to ex-post wealth constraints. Our analysis differs from the received theories of the firm because of our emphasis on dynamic partner changes.

Notes:

Print version record

October 2012.