TY  - JOUR
AU  - Hellmann,Thomas F.
AU  - Thiele,Veikko
TI  - A Theory of the Firm based on Partner Displacement
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 18495
PY  - 2012
Y2  - October 2012
UR  - http://www.nber.org/papers/w18495
L1  - http://www.nber.org/papers/w18495.pdf
N1  - Author contact info:
Thomas F. Hellmann
Sauder School of Business
University of British Columbia
2053 Main Mall
Vancouver, BC V6T 1Z2
CANADA
Tel: 604/822-8476
Fax: 604/822-8477
E-Mail: hellmann@sauder.ubc.ca

Veikko Thiele
Queen's School of Business
Goodes Hall
143 Union Street
Kingston, Ontario
Canada K7L 3N6
E-Mail: vthiele@business.queensu.ca
AB  - 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.
ER  -