A Formal Haggling Theory of Firm Boundaries: A Trade-Off Between Bargaining Costs and Too Much Intervention
19 Pages Posted: 24 Dec 2011 Last revised: 8 Mar 2016
Date Written: December 3, 2015
Abstract
This study aims to provide a formal haggling theory of firm boundaries. In the face of unforeseen disturbances in trade circumstances, trading parties engage in ex post contract renegotiation, which ends with either agreement, disagreement, or third-party intervention. Given that the third-party intervention under integration (i.e., fiat) is more efficient than that under non-integration (i.e., court ordering), I show that integration can economize bargaining costs but suffers from too much intervention. This trade-off provides a formal explanation why selective intervention fails.
Keywords: transaction cost; haggling; fiat; firm boundaries
JEL Classification: D23, L22, M21
Suggested Citation: Suggested Citation
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