A Theory of Firm Scope

Hart, Oliver; Holmström, Bengt

doi:10.3386/w14613

Cited by 82 publications

(67 citation statements)

References 27 publications

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“…The basic organizational building block is a single-good, continuous-action version of Hart and Holmström's (2010) model. The aim is to derive an industry supply curve that summarizes the relationships among price, quantity and ownership structure.…”

Section: Modelmentioning

confidence: 99%

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A Price Theory of Vertical and Lateral Integration*

Legros

Newman²

2013

The Quarterly Journal of Economics

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This article presents a perfectly-competitive model of firm boundary decisions and study their interplay with product demand, technology, and welfare. Integration is privately costly but is effective at coordinating production decisions; nonintegration is less costly, but coordinates relatively poorly. Output price influences the choice of ownership structure: integration increases with the price level. At the same time, ownership affects output, since integration is more productive than nonintegration.For a generic set of demand functions, equilibrium delivers heterogeneity of ownership and performance among ex-ante identical enterprises. The price mechanism transmutes demand shifts into industry-wide re-organizations and generates external effects from technological shocks: productivity changes in some firms may induce ownership changes in others. If the enterprise managers have full title to its revenues, market equilibrium ownership structures are second-best efficient. When managers have less than full revenue claims, equilibrium can be inefficient, with too little integration.

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Section: Modelmentioning

confidence: 99%

“…The organizational building block for the analysis is an adaptation of the model in Hart and Holmström (2010). In order to produce a unit of the con-sumer good, two complementary suppliers, each consisting of a manager and his collection of assets, must enter into a relationship.…”

Section: Introductionmentioning

confidence: 99%

A Price Theory of Vertical and Lateral Integration*

Legros

Newman²

2013

The Quarterly Journal of Economics

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“…Technological synergies and efficiencies in asset use are frequently cited by policy makers and antitrust defendants. Organization economists have emphasized other benefits, and often associated costs: reductions in the costs of transactions, adaptation, or opportunism (Williamson, 1971(Williamson, , 1975Klein, Crawford, and Alchian, 1978); better multitasking incentives (Holmström and Milgrom, 1991); alignment of control and incentives (Grossman and Hart, 1986;Hart and Moore, 1990); or improved coordination (Hart and Holmström, 2010). A complementary class of theories emphasize allocative, rather than productive, efficiency gains achieved by the elimination of double markups, though these shall not concern us.…”

Section: Introductionmentioning

confidence: 99%

Do Prices Determine Vertical Integration?

Alfaro

Conconi

Fadinger

et al. 2016

Review of Economic Studies

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What is the relationship between product prices and vertical integration? While the literature has focused on how integration affects prices, this paper provides evidence that prices can affect integration. Many theories in organizational economics and industrial organization posit that integration, while costly, increases productivity. It follows from firms' maximizing behavior that higher prices induce more integration. The reason is that at low prices, increases in revenue resulting from enhanced productivity are too small to justify the cost, whereas at high prices the revenue benefit exceeds the cost. Trade policy provides a source of exogenous price variation to assess the validity of this prediction: higher tariffs should lead to higher prices and therefore to more integration. We construct firmlevel indices of vertical integration for a large set of countries and industries and exploit cross-section and time-series variation in import tariffs to examine their impact on firm boundaries. Our empirical results provide strong support for the view that output prices are a key determinant of vertical integration. JEL classifications: D2, L2, Keywords: Theory of the firm, vertical integration, product prices. * We are grateful to Daron Acemoglu, Robby Akerlof, Nick Bloom, Francesco Decarolis, Bob Gibbons, Davin Chor, Gene Grossman, Maria Guadalupe, Ali Hortaçsu, Louis Kaplow, Patrick Legros, Margaret McMillan, Emanuel Ornelas, Mike Powell, Raffaella Sadun, Chad Syverson, John Van Reenen, Chris Woodruff and numerous seminar and conference participants for their valuable suggestions and comments. Research funding from the FNRS and the European Commission (PEGGED collaborative project) is gratefully acknowledged by Conconi. For their hospitality and support, Newman is grateful to the Yale Economic Growth Center and the Brown Population Studies and Training Center. We thank Francisco Pino, Andrea Colombo and Qiang Wang for excellent research assistance.

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“…The models of contracts as reference points are presented in Hart and Holmstrom (2008), Hart (2009), and Hart and Holmstrom (2010. Unlike Köszegi and Rabin's approach, this approach assumes that "each party feels entitled to the best outcome permitted by the contract" (Hart and Moore, 2008, p. 33).…”

Section: Related Literaturementioning

confidence: 99%

“…Such behavior can be considered punishment for unfair treatment; it is called shading in the literature on contracts as reference points, such as Hart and Moore (2008), Hart (2009), and Hart and Holmstrom (2010).…”

Section: Introductionmentioning

confidence: 99%

How Can Integration Reduce Inefficiencies Due to Ex Post Adaptation?

Mori

2012

SSRN Journal

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How can integrated firms immediately settle ex post adaptations to unanticipated disturbances? While this question is crucial to the understanding of transaction cost economics (TCE), TCE has not provided any formal answer. This paper develops a model that explores this question by employing three behavioral assumptions: reference-dependent preference, self-serving bias, and shading. We present two reasons why integration can avoid costly renegotiations and realize immediate adaptations; these stem from the fact that while nonintegrated parties have to engage in negotiations for the adaptations, integrated firms can implement these by fiat. First, punishments for rejection of an order under integration are severer than those for rejection of an offer under non-integration. Second, under integration, the utility improvement for a subordinate from rejecting an order is not sufficient to offset the loss from a severe punishment. Furthermore, we point out a trade-off between immediate agreement and the aggregate sense of loss.

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A Theory of Firm Scope

Cited by 82 publications

References 27 publications

A Price Theory of Vertical and Lateral Integration*

A Price Theory of Vertical and Lateral Integration*

Do Prices Determine Vertical Integration?

How Can Integration Reduce Inefficiencies Due to Ex Post Adaptation?

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