A Theory of the Firm Based on Partner Displacement

56 Pages Posted: 27 Oct 2012 Last revised: 16 Oct 2014

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: October 2012

Abstract

We develop a new theory of the firm where asset owners sometimes 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 the 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. Renegotiation cannot eliminate these inefficiencies when agents are wealth constrained. When there is more asset specificity, displacement externalities matter more and retention externality less, so that integration becomes more attractive. Our model also predicts that integration always provides stronger incentives for specific investments, and that wealthy owners actually want to commit to ex-post wealth constraints. Our analysis differs from the received theories of the firm because of our emphasis on dynamic partner changes.

Suggested Citation

Hellmann, Thomas F. and Thiele, Veikko, A Theory of the Firm Based on Partner Displacement (October 2012). NBER Working Paper No. w18495. Available at SSRN: https://ssrn.com/abstract=2167598

Thomas F. Hellmann (Contact Author)

University of Oxford - Said Business School ( email )

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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

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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