Equity and Efficiency in the Organization of Firms

Tanjim Hossain (tanjim.hossain@utoronto.ca), Elizabeth Lyons (lizlyons@ucsd.edu) and Aloysius Siow (siow@chass.utoronto.ca)
Additional contact information
Elizabeth Lyons: University of California, San Diego
Aloysius Siow: University of Toronto

No GRU_2018_018, GRU Working Paper Series from City University of Hong Kong, Department of Economics and Finance, Global Research Unit

Abstract: Using a series of laboratory experiments, this paper shows that fairness concerns of potential co- founders may lead to failure to undertake profitable joint production opportunities. Inefficiency occurs more often when equal division of the firm’s profit would leave one co-founder worse- off relative to her outside option. We find that framing an opportunity as an employment relationship rather than a partnership significantly reduces these inefficiencies and increases subjects’ welfare. Evidence from division of profits and communication logs from free-form negotiations between subjects suggest that only some subjects incorporate outside options to define fairness. Based on this, we provide a theoretical model of how fairness concerns affect the formation of new firms.

Keywords: Organizational Design; Firm Formation; Fairness Concerns; Cooperative Bargaining (search for similar items in EconPapers)
JEL-codes: C92 D83 D91 L14 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2018-07-01
New Economics Papers: this item is included in nep-exp and nep-lma
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Persistent link: https://EconPapers.repec.org/RePEc:cth:wpaper:gru_2018_018

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