On efficient firm formation

Hans Gersbach and Hans Haller

Mathematical Social Sciences, 2020, vol. 107, issue C, 1-12

Abstract: We study the self-organization of a population into productive partnerships (or “firms”) when agents are confronted with a hold-up problem upon making relation-specific investments in those firms. The problem may be mitigated if agents can leave a partnership in which they have invested, bearing the costs yet foregoing the benefits of the investment, join another partnership, invest there anew, and appropriate the surplus created by the new investment. To capture the idea we introduce the notion of reinvestment-proof equilibria in which no agent has an incentive to reinvest or to change his investment in the current firm. We show that the presence of a small inefficient firm causes substantial efficiency gains in all larger firms.

Keywords: Hold-up problem; Firm formation; Reinvestment-proof equilibria; Efficient firm structure (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:matsoc:v:107:y:2020:i:c:p:1-12

DOI: 10.1016/j.mathsocsci.2020.06.001

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