We develop a new theory of the dynamic boundary of the firm where asset owners may want to change partners ex post. We identify 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. Wealth can resolve ex post inefficient partner arrangements, but may weaken ex ante incentives for specific investments.
Hellmann, Thomas, and Veikko Thiele.
"Partner Uncertainty and the Dynamic Boundary of the Firm."
American Economic Journal: Microeconomics,
Firm Behavior: Theory
Organizational Behavior; Transaction Costs; Property Rights
Intertemporal Firm Choice: Investment, Capacity, and Financing
Economics of Contract: Theory
Capital Budgeting; Fixed Investment and Inventory Studies; Capacity