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Title:The Hold-Down Problem and the Boundaries of the Firm: Lessons from a Hidden Action Model with Endogenous Outside Option PDF Logo
Authors:Schnedler, Wendelin
Sunde, Uwe
Issue Date:2002
Series/Report no.:IZA Discussion paper series 464
Abstract: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.
Subjects:hidden action
moral hazard
endogenous outside option
authority
outsourcing
JEL:L23
D82
D23
L33
Document Type:Working Paper
Appears in Collections:IZA Discussion Papers, Forschungsinstitut zur Zukunft der Arbeit (IZA)

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