Resource title

The Hold-Down Problem and the Boundaries of the Firm: Lessons from a Hidden Action Model with Endogenous Outside Option

Resource image

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Resource description

This paper offers a rationale for limiting the delegation of (real) authority, which neither relies on insurance arguments nor depends on ownership structure. We analyse a repeated hidden action model in which the actions of a risk neutral agent determine his future outside option. Consequently, the agent can improve his future bargaining position, which gives the principal an incentive to retain sufficient control over the agent?s actions. Using respective one-period contracts, the principal can implement the efficient outcome while ?selling the shop? to the agent is sub-optimal. This provides an argument for integration if the boundary of the firm is defined by control rights rather than the entitlement to revenues.

Resource author

Wendelin Schnedler, Uwe Sunde

Resource publisher

Resource publish date

Resource language

eng

Resource content type

text/html

Resource resource URL

http://hdl.handle.net/10419/21493

Resource license

Adapt according to the presented license agreement and reference the original author.