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A Theory of the Firm based on Partner Displacement

Thomas Hellmann () and Veikko Thiele ()

No 18495, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We develop a new theory of the firm where asset owners sometimes want to change partners ex-post. The model identifies a fundamental trade-off between (i) a "displacement externality" under non-integration, where a partner leaves a relationship even though the 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. Renegotiation cannot eliminate these inefficiencies when agents are wealth constrained. When there is more asset specificity, displacement externalities matter more and retention externality less, so that integration becomes more attractive. Our model also predicts that integration always provides stronger incentives for specific investments, and that wealthy owners actually want to commit to ex-post wealth constraints. Our analysis differs from the received theories of the firm because of our emphasis on dynamic partner changes.

JEL-codes: D23 D82 D86 L22 M20 (search for similar items in EconPapers)
Date: 2012-10
New Economics Papers: this item is included in nep-mic
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