Governance of Adjustments

Posted: 18 Dec 2003

See all articles by Birger Wernerfelt

Birger Wernerfelt

Massachusetts Institute of Technology (MIT) - Sloan School of Management

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Abstract

The article proposes a research program to compare game forms in terms of their ability to govern ex post adjustments to ex ante contracts. The comparisons can be based on direct implementation-costs or the extent to which desirable adjustments are not implemented. In several examples of the program, we compare three game forms: negotiation over each adjustment, ex ante price lists, and implicit contracts leaving the stipulation of adjustments to one player. If the latter game form is defined as an employment relationship, the theory of the firm becomes a special case of the program. The article starts with a discussion of the nature and magnitude of adjustment-costs, followed by an exposition of four examples. We then discuss the role of asset ownership, review some empirical evidence, and look at broader implications.

Keywords: theory of the firm, integration, employment

JEL Classification: D2, L2

Suggested Citation

Wernerfelt, Birger, Governance of Adjustments. Journal of Business, Vol. 77, No. 2, April 2004. Available at SSRN: https://ssrn.com/abstract=479801

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