Agency Costs and the Limits of Integration

Trond Olsen

RAND Journal of Economics, 1996, vol. 27, issue 3, 479-501

Abstract: In this article I identify a type of integration cost that is associated with agency relations within the firm. This cost arises when the firm's principal cannot fully commit to long-term contracts with the firm's agents, and these agents have private information. In the model, integration can lead to value enhancements through the realization of complementarity gains. But this will also lead to larger rents, which is costly for the principal. I show that this type of cost may be sufficiently large to act as an effective limit for integrations that are otherwise profitable.

Date: 1996
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