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  3. American Economic Journal: Microeconomics
  4. November 2017
  5. Partner Uncertainty and the Dynamic Boundary of the Firm

Partner Uncertainty and the Dynamic Boundary of the Firm

  • Thomas Hellmann
  • Veikko Thiele
American Economic Journal: Microeconomics
vol. 9, no. 4, November 2017
(pp. 277-302)
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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.

Citation

Hellmann, Thomas, and Veikko Thiele. 2017. "Partner Uncertainty and the Dynamic Boundary of the Firm." American Economic Journal: Microeconomics, 9 (4): 277-302. DOI: 10.1257/mic.20160016

Additional Materials

JEL Classification

  • D21 Firm Behavior: Theory
  • D23 Organizational Behavior; Transaction Costs; Property Rights
  • D25 Intertemporal Firm Choice: Investment, Capacity, and Financing
  • D62 Externalities
  • D86 Economics of Contract: Theory
  • G31 Capital Budgeting; Fixed Investment and Inventory Studies; Capacity
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