Mergers, Employee Hold-Up and the Scope of the Firm: An Intrafirm Bargaining Approach to Mergers

38 Pages Posted: 15 Feb 2014

See all articles by Lars Stole

Lars Stole

University of Chicago - Booth School of Business

Jeffrey Zwiebel

Stanford Graduate School of Business

Date Written: August 27, 2008

Abstract

We explore the scope of the firm in a setting where employee wage contracts are nonbinding and firms cannot contract with one another on their respective employment decisions. Specifically, we consider two divisions that have scope for beneficial interaction, and examine whether it is best for them, given this incomplete contracting environment, to produce jointly within the same firm or to interact over the market. Employing a multilateral bargaining framework, we analyze how employee wages, firm profits and employment levels are altered by merger when employees have some hold-up power. Among other results, our analysis suggests that merged production is more likely when the optimal contributions by the two firms to joint production are more unequal (leading to productive and bargaining externalities), while nonintegration is more likely the greater the productive gains to joint interaction between the firms (despite such gains being equally realizable under both merger and nonintegration).

Keywords: contract theory, incentives

JEL Classification: C70, D82

Suggested Citation

Stole, Lars A. and Zwiebel, Jeffrey H., Mergers, Employee Hold-Up and the Scope of the Firm: An Intrafirm Bargaining Approach to Mergers (August 27, 2008). Available at SSRN: https://ssrn.com/abstract=2396077 or http://dx.doi.org/10.2139/ssrn.2396077

Lars A. Stole (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-7309 (Phone)
773-702-0458 (Fax)

Jeffrey H. Zwiebel

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-723-2917 (Phone)
650-725-7979 (Fax)

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