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

Multiple version iconThere are 2 versions of this paper

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

Mori, Yusuke, A Formal Behavioral Model of Firm Boundaries: Why Does Authority Relation Mitigate Ex Post Disputes over Trade Value? (May 6, 2013). Working Paper Series / Center for Japanese Business Studies , Available at SSRN: https://ssrn.com/abstract=2047708 or http://dx.doi.org/10.2139/ssrn.2047708

Yusuke Mori (Contact Author)

Ritsumeikan University ( email )

Japan

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