Haggling for Rents, Relational Contracts, and the Theory of the Firm
University of Bonn - Economic Science Area
October 15, 2010
Schmalenbach Business Review, Vol. 62, pp. 359-377, October 2010
I analyze how ownership can be structured to minimize the haggling costs due to contractual incompleteness. I model haggling as a contest in which integration gives the integrating party a relative advantage over the integrated party. In a one-period model, this implies that the contest will become more uneven and social waste reduced, making integration the optimal strategy. In the infinitely repeated version of the model, the parties can also enter a relational contract under which each party promises not to engage in haggling. I show that such a contract is less stable under integration, since the integrating party gains much more from deviating than does any party under non-integration.
Number of Pages in PDF File: 19
Keywords: Integration, Non-Integration, Relational Contract, Rent Seeking
JEL Classification: D23, D72, D74, L14, L22
Date posted: November 25, 2010
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