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Abstract:
The parties to a contract typically make a lot of decisions during the time it is in force, and the paper is based on the premise that it takes time to be involved in any one of these decisions. Attempts to economize on decision-making time then imply that the parties may write a contract in which each cedes some decision rights to the other. The cost of the arrangement is that the information and preferences of the uninvolved party are neglected. We find that decisions are more likely to be left out of contracts if only one player attaches significant weight to them and simultaneously is well informed. While the direct effect of this may be small, it is dramatically amplified if the decision-maker can be disciplined by the threat of renegotiation. We identify a set of conditions under which the possibility of renegotiation allows the parties to leave all non-price decisions out of the contract. By thus arguing that the threat of renegotiation allows contractual incompleteness, the paper reverses the direction of causality stressed by the literature.

Incomplete Contracts, Renegotiation

Abstract:
Economic actors have to make lots of decisions, and the paper is based on the premise that it takes time to be involved in any one of them. Attempts to economize on decision-making time imply that groups of peers may abdicate decision-making authority to a small set of managers even though this means that the information and preferences of the uninvolved players are neglected. We find that players are more likely to be managers if they have better information and more representative, but stronger, preferences. The possibility of ex post intervention may force managers to take the preferences of others into account and can lead to smaller management teams. On the other hand, the threat of intervention may reduce managers' incentives to use their private information. We proceed to suggest that the argument may explain employees' willingness to let their bosses decide, and thus throw some light on the theory of the firm.

Firms, managers, renegotiation

Abstract:
In the context of an employment relationship, I present an argument suggesting that it is more efficient for the boss to own productive assets. The idea is that a conflict between productivity and depreciation is internalized if the player deciding what an asset is used for also has residual claims. An empirical test finds evidence consistent with this. By asking whether the boss should own the assets, the paper reverses the reasoning from the literature in which it is argued that the owner has power and thus is the boss.

Asset Ownership, Integration, Theory of the Firm

Abstract:
In the context of an employment relationship, I present an argument suggesting that it is more efficient for the boss to own the productive assets. The idea is that a conflict between productivity and depreciation is internalized if the player deciding what an asset is used for also has residual claims. An empirical test finds evidence consistent with this. By asking whether the boss should own the assets, the paper reverses the reasoning from the literature in which it is argued that the owner has power and thus is the boss.

Abstract:
The Resource-Based View of the firm (RBV) posits as a necessary condition for diversification that a firm's resources can be leveraged beyond its original business. To achieve sufficiency we need to know whether the resource is best leveraged inside the firm or through a market contract. We therefore couple the RBV with the Adjustment-Cost Theory of the firm to make and test a set of predictions about when firms should extend their scope. We find that firm should, and do, extend their horizontal and vertical scope when they compete in industries with more fast paced new product development. Two strong points about the study are (1) Because we are specific about the theory of the firm invoked, we can make more precise predictions, and (2) we test the predictions in production functions as well as in estimates of actual firm scope.

Diversification, Theory of the Firm, Resource-based View

Abstract:
This paper is concerned with communication within a team of players trying to coordinate in response to information dispersed among them. The problem is nontrivial because they cannot communicate all information instantaneously but have to send longer or shorter sequences of messages, using coarse codes. We focus on the design of these codes and show that members may gain compatibility advantages by using identical codes and that this can support the existence of several, more or less efficient, symmetric equilibria. Asymmetric equilibria may exist only if coordination across different sets of members is of sufficiently different importance. The results are consistent with the stylized fact that firms differ even within industries and that coordination between divisions is harder than coordination inside divisions.

Abstract:
The paper is concerned with communication within a team of players trying to coordinate in response to information dispersed among them. The problem is nontrivial because they cannot communicate all information instantaneously, but have to send longer or shorter sequences of messages, using coarse codes. We focus on the design of these codes and show that members may gain compatibility advantages by using identical codes, and that this can support the existence of several, more or less efficient, symmetric equilibria. Asymmetric equilibria may exist only if coordination across different sets of members is of sufficiently different importance. The results are consistent with the stylized fact that firm differ even within industries and that coordination between divisions is harder than coordination inside divisions.

Communication, Organization

Abstract:
The paper is concerned with communication within a team of players trying to coordinate in response to information dispersed among them. The problem is non-trivial because they cannot communicate all information instantaneously, but have to send longer or shorter sequences of messages, using coarse codes. We focus on the design of these codes and show that members may gain compatibility advantages by using identical codes, and that this can support the existence of several, more or less efficient, symmetric equilibria. Asymmetric equilibria exist if coordination across different sets of members is of differing importance, and fewer symmetric equilibria exist if the members' local environments are sufficiently heterogeneous. The results are consistent with the stylized fact that firms differ even within industries, and that coordination between divisions is harder than coordination inside divisions.

Abstract:
We study the division of labor within an industry, formulate it as a generalized make-or-buy problem, and characterize the optimal allocation of work as that minimizing the sum of adjustment-costs within and between firms. Using a unique dataset on eight segments of the global automobile industry, we test the theory from several angles: We first show that any two tasks are more likely to be performed by the same firm if mutual adjustments between them are needed on a sufficiently frequent basis. To take indirect effects into account, we then look at the entire industry and find that a disproportionate number of adjustments are managed inside firms. We finally use simulated GMM to estimate a structural model in which industry design is portrayed as the solution to an integer program aimed at minimizing industry-wide adjustment-costs. The program is extremely complex and while there is a significant heterogeneity in the eight actual designs, they all fit the model very well. The main substantive contribution of the paper is thus to present robust evidence consistent with the view that the firm is a low variable, but high fixed cost way to govern adjustments. A more methodological contribution is to introduce industry-level estimates and show that they outperform the firm-level estimates used in other studies of make-or-buy decisions.

Make-or-buy, Simulated GMM, Adjustment-costs

Abstract:
The article proposes a research program to compare game forms in terms of their ability to govern ex post adjustments to ex ante contracts. The comparisons can be based on direct implementation-costs or the extent to which desirable adjustments are not implemented. In several examples of the program, we compare three game forms: negotiation over each adjustment, ex ante price lists, and implicit contracts leaving the stipulation of adjustments to one player. If the latter game form is defined as an employment relationship, the theory of the firm becomes a special case of the program. The article starts with a discussion of the nature and magnitude of adjustment-costs, followed by an exposition of four examples. We then discuss the role of asset ownership, review some empirical evidence, and look at broader implications.

theory of the firm, integration, employment

Abstract:
The article proposes a research program to compare game forms in terms of their ability to govern ex post adjustments to ex ante contracts. The comparisons can be based on direct implementation-costs or the extent to which desirable adjustments are not implemented. In several examples of the program, we compare three game forms: Negotiation over each adjustment, ex ante price lists, and implicit contracts leaving the stipulation of adjustments to one player. If the latter game form is defined as an employment relationship, the theory of the firm becomes a special case of the program. The article starts with a discussion of the nature and magnitude of adjustment-costs, followed by an exposition of four examples. We then discuss the role of asset ownership, review some empirical evidence, and look at broader implications.

Theory of the Firm, Employment Relationship, Contracts

Abstract:
Considering a principal-agent model in which the difficulty of the agent's action is better known ex interim than ex ante, we compare two contracting regimes; one with commitment to an ex ante negotiated contract, and one with an ex interim negotiated contract. The ex ante contract can not have too strong incentives, but attempts to negotiate a stronger ex interim contract may result in bargaining failure. The relative efficiency of the two contracting regimes therefore depends on parameter values. The argument can be interpreted as an analysis of the tradeoff between weak incentives in the firm and the possibility of unsuccessful negotiations in the market.

Theory of the Firm, Adjustments, Low-powered Incentives

Abstract:
We look at a principal-agent model in which the agent has to perform an action, the difficulty of which is better known ex interim than ex ante. We compare two contracting regimes; one with commitment to an ex ante negotiated contract, and one with an ex interim negotiated contract. The ex ante contract can not be too steep, but attempts to negotiate a steeper ex interim contract may result in bargaining failure. We find that the relative efficiency of the two contracting regimes depends on the nature of the differences between tasks. In a dynamic version of the analysis, we further find that the comparison depends on the frequency with which new tasks are needed. The argument can be interpreted as an analysis of the tradeoff between weak incentives in the firm and the possibility of unsuccessful negotiations in the market.

Theory of the Firm, Employment, Adjustments, Adaptation

Abstract:
The paper is a study of barriers to communication in terms of agents' incentives to search for and communicate complementary information. In particular, I look at the value of commitment by comparing game forms in which a contract is negotiated prior to, versus after, search and communication. I will use the names "firms" and "markets", respectively, for these two game forms. The comparison depends on three effects. (1) The bargaining power effect: Since the decision to communicate reveals information about preferences, it implies a loss of bargaining power when the players negotiate ex post. This hurts the incentives to communicate and therefore the incentives to search. (2) The incentive transfer effect: If the gains from adjustment accrue unevenly, ex ante negotiation may leave one of the players without incentives to communicate and search. With ex post negotiation, that player can bargain for a share of the gains. (3) The bargaining efficiency effect: The negotiation process itself may be more efficient ex post because more information has been revealed. The net effect depends on the magnitude of the gains and their accrual. If negotiation normally leads to agreement, it is better done ex ante in cases where adjustments yield smaller, more evenly accruing gains. When gains are larger and accrue less evenly, ex post negotiation implements more communication and search.

Theory of the firm, coordination, communication

Abstract:
In a bilateral monopoly, we are looking at the seller's incentives to propose an improved widget design under two different negotiation rules. With Renegotiation, the players negotiate a price after a design has been agreed upon, and with Commitment, they negotiate the price beforehand. The comparison depends on two effects. (1) Bargaining power: Since communication reveals information about his preferences, a seller with little bargaining power may prefer to remain quiet in anticipation of ex post negotiation. (2) Incentive transfer: If the gains from adjustment are large, ex post negotiation gives the seller a chance to share the gains. On balance, Renegotiation is better when adjustments are rare but large, while Commitment is better when adjustments are frequent but small. The comparison might help explain why some contracts have more features left incomplete and throw some light on the nature of the employment relationship.

Contract Theory, Communication, Renegotiation

Abstract:
We use a dataset describing ownership of productive assets in the carpentry trade to evaluate several factors influencing the allocation of asset ownership between an employer and his employees. The findings suggest that the allocation involves a tradeoff between two incentive effects influencing how the employee uses the asset and what the employer decides it should be used for. In particular, the allocation of ownership hinges on whether an asset is easily lost or stolen, which favors employee ownership, and whether the employer's task assignment affects the asset's depreciation, which favors employer ownership. There is also evidence that more expensive assets and assets that are shared by more than one employee are more likely to be owned by the employer. The results suggest that a general theory of asset ownership should be able to account for at least these effects.

Integration, theory of the firm, ownership,assets

Abstract:
We use a dataset describing ownership of productive assets in the carpentry trade to evaluate several factors influencing the allocation of asset ownership among employers and employees. The findings suggest that the allocation involves a tradeoff between two incentive effects influencing how the employee uses the asset and what the employer decides it should be used for. There is also evidence that more expensive assets and assets that are shared by more than one employee are more likely to be owned by the employer. The results suggest that a general theory of asset ownership should be able to account for at least these four effects.

Asset Ownership, Theory of the Firm

Abstract:
This paper deals with bounded rationality as a way to describe behavior and focuses on the question of how to build such boundedly rational models. The first part is a discussion of the reasons why such models are needed and on the situations in which they can be regarded as more particularly useful. The second part examines three strategies of research towards bounded rationality modeling which have emerged in the last ten years and weights them. The concluding remarks offer a first link between the respective typologies of strategies and of situations and calls for additional experimental work by marketing scientists and economists together.

Decision-making, consumer behavior, procedural rationality, choice functionals, adaptive behavior

Abstract:
A contract with K-class pricing divides a large set of goods or services into K classes and assigns a single price to any element of a class. Class pricing can be efficient when several different versions may be traded and it is costly to assign individual prices to all of them. It is more likely to be used when the number of buyers is smaller, the number of versions is larger, the variance in costs is smaller, and demand ex ante differs less between versions. Under simple conditions classes should be designed to minimize the sum of squared within-class cost deviations. In bilateral trades, the most efficient game form is that in which classes are designed by the player with less varied gains from trade, while the traded version is chosen by the other player. Decisions are thus made by the player who cares most about them, while the opponent prescribes a set of limits.

Pricing costs, bargaining costs, incomplete contract

Abstract:
A mechanism with low direct cost of use may be preferred to alternatives implementing more efficient allocations. We show this experimentally by giving pairs of subjects the option to agree on a single average price for a sequence of trades - in effect pooling several small bargains into a larger one. We make pooling costly by tying it to some inefficient trades, but subjects nevertheless reveal strong tendencies to pool, particularly when more bargains remain to be struck and when bargaining is face to face. The results suggest that implementation costs could play a significant role in the use of many common trading practices, including the employment relationship.

Bargaining Costs, Experiments, Theory of the Firm

Abstract:
Attempts to economize on bargaining costs imply that two parties may write a contract which is incomplete in the sense that each party tacitly cedes some decision rights to the other. If decision makers can be disciplined by the threat of ex post renegotiation of decisions initially delegated to them, contracts may be even more incomplete. In the limit, the parties may leave all non-price decisions out of the contract. By thus arguing that the threat of renegotiation facilitates contractual incompleteness, the paper reverses the direction of causality stressed by the literature.

Abstract:
Attempts to economize on bargaining costs imply that two parties may write a contract which is incomplete in the sense that each party tacitly cedes some decision rights to the other. If decision-makers can be disciplined by the threat of ex post renegotiation of decisions initially delegated to them, contracts may be even more incomplete. In the limit, the parties may leave all non-price decisions out of the contract. By thus arguing that the threat of renegotiation facilitates contractual incompleteness, the paper reverses the direction of causality stressed by the literature.

Incomplete contracts, theory of the firm

Abstract:
Attempts to economize on decision-making time imply that groups of peers may delegate authority to a small committee of managers even though this means that the information and preferences of the uninvolved players are neglected. Decisions are more likely to be delegated to players with better information and more representative preferences. The possibility of ex post protests may force managers to take the preferences of others into account but may also give them incentives to ignore their private information. The argument may explain employees' willingness to let bosses decide, and thus throw some light on the theory of the firm.

Abstract:
Attempts to economize on decision-making time imply that groups of peers may delegate authority to a small committee of managers even though this means that the information and preferences of the uninvolved players are neglected. Decisions are more likely to be delegated to players with better information and more representative preferences. The possibility of ex post protests may force managers to take the preferences of others into account but may also give them incentives to ignore their private information. The argument may explain employees' willingness to let bosses decide, and thus throw some light on the theory of the firm.

Delegation, Committees, Managers, Firms

Abstract:
Firms can be analyzed from the resource or product aspect. This paper develops simple economic tools for analyzing a firm's resource position, and uses a resource product matrix to examine some strategic options suggested by the resource-based view. The resource-based view provides basis for addressing key issues in strategy formulation, such as basis for diversification and acquisition. A resource is any strength or weakness of a given firm, tangible or intangible, that is semi-permanently tied to the firm. Considered specifically are the circumstances that will lead to longer-term high returns. Strategies that allow a firm's resources to be managed for high returns are considered, under four circumstances: bargaining power of suppliers and buyers and threat of substitute resources, first mover advantages, building resource position barriers, and mergers and acquisitions. A resource-product matrix is used to illustrate several patterns of resource development: sequential entry, exploit and develop, and stepping stones. Examining a firm in terms of its resources and assets rather than its products provides a different view of available strategic options, and helps to identify means of using its resources as barriers to other firms. (TNM)

Growth strategies, Firm strategies, Strategic planning, Assets, First-mover advantage, Barriers to entry, Resource model, Firm growth

Abstract:
We ask how bargainers' incentives to communicate about more efficient widget designs depend on whether they negotiate price prior to, or after, fixing the traded design. We find three effects: (1) Since communication reveals information about preferences, bargainers with little power prefer to remain quiet prior to bargaining. (2) Later bargaining gives communicators a chance to share in joint gains from more efficient trades. (3) The revealed preference information enhances the efficiency of the bargaining process. The comparison might help explain why some contracts have more features left incomplete and throw some light on the nature of the employment relationship.

Bargaining costs, communication, renegotiation

Abstract:
Based on the adjustment-cost theory of the firm and the resource-based view, we argue that many resources contributing to successful new product development make it more attractive for firms to have wider scope. We test the predictions by looking at both actual firm behavior and production functions.

Theory of the firm, Adjustments, resources

Abstract:
In order to push a customer and market orientation deep into the organization many firms have adopted systems by which internal customers rate internal suppliers on some measure-- often satisfaction. The internal supplier receives a larger reward for a higher rating. We examine incentive systems based on such rating systems and show that gainsharing between the rater (internal customer) and the ratee (internal supplier) normally will occur. We show that, for two common internal customer-internal supplier incentive systems, the firm can select parameters for the reward functions such that this gainsharing can be factored out and such that both the internal customer and the internal supplier choose the actions that are the same that a risk- neutral firm would choose to maximize profit if it had to reimburse these employees for their costly efforts. Some risk is transferred from the firm to me employees and the firm must pay for this, but in return the firm need not observe either the internal supplier's actions or the internal customer's actions. The incentive systems are robust even if the firm guesses wrongly about what employees perceive as costly and about how employee actions affect profit.

Abstract:
I compare alternative game forms for situations where a buyer needs a sequence of human asset services. The hierarchy is defined as a game form in which the parties engage in once- and-for-all wage negotiation, the boss describes desired services sequentially, and either party may terminate the relationship at will. If many diverse and frequent adjustments are needed, this involves lower adjustment costs than any alternative game form. The price list game form is better when the list of possible adjustments is small, and the negotiation-as-needed game form is better when adjustments are needed infrequently. An empirical test supports the theory.