A Theory of the Firm based on Partner Displacement

Thomas F. Hellmann, Veikko Thiele

NBER Working Paper No. 18495
Issued in October 2012
NBER Program(s):   IO   PR

We develop a new theory of the firm where asset owners sometimes want to change partners ex-post. The model identifies a fundamental trade-off between (i) a "displacement externality" under non-integration, where a partner leaves a relationship even though the 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. Renegotiation cannot eliminate these inefficiencies when agents are wealth constrained. When there is more asset specificity, displacement externalities matter more and retention externality less, so that integration becomes more attractive. Our model also predicts that integration always provides stronger incentives for specific investments, and that wealthy owners actually want to commit to ex-post wealth constraints. Our analysis differs from the received theories of the firm because of our emphasis on dynamic partner changes.

You may purchase this paper on-line in .pdf format from ($5) for electronic delivery.

Information about Free Papers

You should expect a free download if you are a subscriber, a corporate associate of the NBER, a journalist, an employee of the U.S. federal government with a ".GOV" domain name, or a resident of nearly any developing country or transition economy.

If you usually get free papers at work/university but do not at home, you can either connect to your work VPN or proxy (if any) or elect to have a link to the paper emailed to your work email address below. The email address must be connected to a subscribing college, university, or other subscribing institution. Gmail and other free email addresses will not have access.


Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w18495

Users who downloaded this paper also downloaded these:
Brown, Dimmock, and Weisbenner w18389 The Supply of and Demand for Charitable Donations to Higher Education
Phillips and Zhdanov w18346 R&D and the Incentives from Merger and Acquisition Activity
Bresnahan and Levin w17889 Vertical Integration and Market Structure
Deng, Gyourko, and Wu w18403 Land and House Price Measurement in China
BĂ©nabou and Tirole w18936 Bonus Culture: Competitive Pay, Screening, and Multitasking
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us