Title

A Formal Theory of Firm Boundaries: A Trade-Off between Rent Seeking and Bargaining Costs

Abstract

We develop a theory of firm boundaries in the spirit of transaction cost analysis, in which trading parties engage in ex post value split. We show that ex post inefficient bargaining under non-integration creates a trade-off between rent seeking and bargaining costs: while non-integration incurs lower rent-seeking costs than integration, it suffers from bargaining delay and breakdown, which never occur under integration. This result explains why rent-seeking activities within firms are likely to be more costly than those between firms, and offers a formal justification for the "costs of bureaucracy" in Williamson (1985).

Inquiries

Yusuke MORI
Research Fellow of Japan Society for the Promotion of Science,
Institute of Social Science, The University of Tokyo,
7-3-1 Hongo, Bunkyo-ku, Tokyo, 113-0033, JAPAN