Partner Uncertainty and the Dynamic Boundary of the Firm†

Partner Uncertainty and the Dynamic Boundary of the Firm† AbstractWe develop a new theory of the dynamic boundary of the firm where asset owners may want to change partners ex post. We identify a fundamental trade-off between (i) a “displacement externality” under non-integration, where a partner leaves a relationship even though his 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. With more asset specificity, displacement externalities matter more and retention externalities less, so that integration becomes more attractive. Wealth can resolve ex post inefficient partner arrangements, but may weaken ex ante incentives for specific investments. (JEL D21, D23, D25, D62, D86, G31) http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Economic Journal: Microeconomics American Economic Association

Partner Uncertainty and the Dynamic Boundary of the Firm†

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Publisher
American Economic Association
Copyright
Copyright © 2017 © American Economic Association
ISSN
1945-7685
D.O.I.
10.1257/mic.20160016
Publisher site
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Abstract

AbstractWe develop a new theory of the dynamic boundary of the firm where asset owners may want to change partners ex post. We identify a fundamental trade-off between (i) a “displacement externality” under non-integration, where a partner leaves a relationship even though his 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. With more asset specificity, displacement externalities matter more and retention externalities less, so that integration becomes more attractive. Wealth can resolve ex post inefficient partner arrangements, but may weaken ex ante incentives for specific investments. (JEL D21, D23, D25, D62, D86, G31)

Journal

American Economic Journal: MicroeconomicsAmerican Economic Association

Published: Nov 1, 2017

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