Partner Uncertainty and the Dynamic Boundary of the Firm

Hellmann, Thomas and Thiele, Veikko (2017) Partner Uncertainty and the Dynamic Boundary of the Firm. American Economic Journal: Microeconomics. (Accepted)

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Abstract

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: Article
Keywords: Asset ownership, control rights, firm boundaries, asset specificity, specific investments, wealth constraints, finance
Subject(s): Finance
Date Deposited: 27 Apr 2017 15:39
Last Modified: 27 Apr 2017 15:39
Funders: N/A
URI: http://eureka.sbs.ox.ac.uk/id/eprint/6349

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