A Formal Behavioral Model of Firm Boundaries: Why Does Authority Relation Mitigate Ex Post Adaptation Problems?

Yusuke Mori

ISER Discussion Paper from Institute of Social and Economic Research, Osaka University

Abstract: We explore why authority within firms helps trading parties immediately settle ex post adaptation problems despite the possibility of a subordinate's disobedience to the orders of his boss. By employing three crucial behavioral assumptions (reference-dependent preference, self-serving bias, and shading), we point out that the choice of governance structure affects trading parties' expectations about outcome of ex post adaptations and show that a subordinate is likely to obey orders of his boss because he is expected to do so. Nevertheless, our study also points out that such a positive aspect of authority comes with subordinate's psychological disutility.

Date: 2013-01
New Economics Papers: this item is included in nep-hme, nep-hpe and nep-mic
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Persistent link: https://EconPapers.repec.org/RePEc:dpr:wpaper:0863

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