Partner Uncertainty and the Dynamic Boundary of the Firm

33 Pages Posted: 29 Aug 2012 Last revised: 20 Feb 2017

See all articles by Thomas F. Hellmann

Thomas F. Hellmann

University of Oxford - Said Business School; University of Oxford - Said Business School

Veikko Thiele

Queen's University - Smith School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: March 15, 2015

Abstract

We develop a new theory of the dynamic boundary of the firm where asset owners may want to change partners ex-post. The model identifies a fundamental trade-off between (i) a "displacement externality" under non-integration, where a partner leaves a relationship even though his benefit is worth less than the loss to the displaced partner, and (ii) a "retention externality" under integration, where a partner inefficiently retains the other. With more asset specificity, displacement externalities matter more and retention externalities less, so that integration becomes more attractive. Our model also shows that wealthy partners would want to commit to ex-post wealth constraints.

Keywords: Asset ownership, control rights, firm boundaries, asset specificity, specific investments, wealth constraints

JEL Classification: D23, D82, D86

Suggested Citation

Hellmann, Thomas F. and Thiele, Veikko, Partner Uncertainty and the Dynamic Boundary of the Firm (March 15, 2015). Saïd Business School WP 2015-4. Available at SSRN: https://ssrn.com/abstract=2137509 or http://dx.doi.org/10.2139/ssrn.2137509

Thomas F. Hellmann

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain
+44 (0)1865 288937 (Phone)

HOME PAGE: http://www.sbs.ox.ac.uk/community/people/thomas-hellmann

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain
+44 (0)1865 288937 (Phone)

HOME PAGE: http://www.sbs.ox.ac.uk/community/people/thomas-hellmann

Veikko Thiele (Contact Author)

Queen's University - Smith School of Business ( email )

Goodes Hall
143 Union Street
Kingston, ON K7L 3N6
Canada
+1 613 533-2783 (Phone)
+1 613-533-6589 (Fax)

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