A theory of firm scope.ppt

A theory of firm scope Oliver Hart Bengt Holmstr?m Outline of talk Motivation Key differences to existing literature Key differences to existing literature (2) Basic Model - Setup Basic Model – Setup (cont‘d) Objective Functions of decision-makers Objective Functions of decision-makers Objective Functions of decision-makers (cont‘d) Implications of the basic model Implications of the basic model Application : Horizontal Interaction Further Assumptions Time structure of the game Time structure of the game Time structure of the game Leading organizational forms Will Organization be chosen efficiently ex ante? When will ?the units“ decide to coordinate? Restated decision rules Graph 1: Decision Space Efficient Coordination Coordination Decision under Non-Integration Coordination decision under Integration Discussion of results Application: Vertical Interaction Application: Vertical Interaction (cont‘d) Conclusion * * Motivation and further introduction The basic model Application to horizontal firm interaction Notes on vertical firm interaction Conclusion Existing standard literature (Hart/Moore): Boundaries of the firm chosen such, as to optimize incentives for undertaking relationship-specific investment. Firm scope defined by assets controlled by firm Shortcomings: Businessmen define firms rather by their set of activities Theory is not really feasible to think about large, manager-run firms or also industry dynamics Process: Ownership rights do not define ex post bargaining power of parties but rather who has the right to decide about relationship-specific investment. Relationship-specific investment is tied to a firm and not to an individual Assumptions: Investment decision non-contractible (even ex post) but transferable through ownership Managers of firms enjoy non-transferable private benefits Owner‘s can divert a firm‘s profit Unit A led by Boss A Generates monetary profits va and private non-transferable benefits wa Generates monetary