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Partner Uncertainty and the Dynamic Boundary of the Firm

Thomas Hellmann () and Veikko Thiele

American Economic Journal: Microeconomics, 2017, vol. 9, issue 4, 277-302

Abstract: We 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-codes: D21 D23 D25 D62 D86 G31 (search for similar items in EconPapers)
Date: 2017
Note: DOI: 10.1257/mic.20160016
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Handle: RePEc:aea:aejmic:v:9:y:2017:i:4:p:277-302