A Formal Behavioral Model of Firm Boundaries: Why Does Authority Relation Mitigate Ex Post Disputes over Trade Value?
Working Paper Series / Center for Japanese Business Studies
44 Pages Posted: 29 Apr 2012 Last revised: 7 Jun 2013
There are 2 versions of this paper
A Formal Behavioral Model of Firm Boundaries: Why Does Authority Relation Mitigate Ex Post Disputes over Trade Value?
A Formal Behavioral Model of Firm Boundaries: Why Does Authority Relation Mitigate Ex Post Adaptation Problems?
Date Written: May 6, 2013
Abstract
We explore why authority within firms helps trading parties immediately settle ex post disputes over trade value, which are invited by unprogrammed adaptation, despite the possibility of a subordinate's disobedience to the orders of his boss. By employing three crucial behavioral assumptions (reference-dependent preference, self-serving bias, and shading), we point out that the choice of governance structure affects trading parties' expectations about outcome of ex post value split and show that a subordinate is likely to obey orders of his boss because he is expected to do so. Nevertheless, our study also points out that such a positive aspect of authority comes with subordinate's psychological disutility.
Keywords: reference-dependent preference, self-serving bias, contracts as reference points, transaction cost, ex post adaptation
JEL Classification: D23, L22
Suggested Citation: Suggested Citation
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