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Partner Uncertainty and the Dynamic Boundary of the Firm

Hellmann, Thomas and Thiele, Veikko (2015) Partner Uncertainty and the Dynamic Boundary of the Firm. Said Business School Working Paper 2015-4.

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We develop a new theory of the dynamic boundary of the firm where asset owners may 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 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. Our model also shows that wealthy partners would want to commit to ex-post wealth constraints.

Item Type: Oxford Saïd Research Paper
Keywords: Asset ownership, control rights, firm boundaries, asset specificity, specific investments, wealth constraints, finance
Subject(s): Finance
Centre: Faculty of Finance
Date Deposited: 15 May 2015 15:23
Last Modified: 23 Oct 2015 14:08

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