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

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  • Yusuke Mori

    (Research Fellow of Japan Society for the Promotion of Science, Institute of Social Science, The University of Tokyo, JAPAN)

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).

Suggested Citation

  • Yusuke Mori, 2013. "A Formal Theory of Firm Boundaries: A Trade-Off between Rent Seeking and Bargaining Costs," Discussion Paper Series DP2013-20, Research Institute for Economics & Business Administration, Kobe University.
    • Handle: RePEc:kob:dpaper:dp2013-20
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    File URL: https://www.rieb.kobe-u.ac.jp/academic/ra/dp/English/DP2013-20.pdf
    File Function: First version, 2013
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    References listed on IDEAS

    as
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