Working Paper: CEPR ID: DP4688
Authors: Hans Gersbach; Hans Haller
Abstract: Agents from a homogeneous population organize themselves into productive partnerships and are confronted with a hold-up problem when making relation-specific investments in those partnerships. The problem is mitigated if agents can leave a partnership in which they have invested, bear the costs yet forego the benefits of the investment, join another partnership, invest there anew, and appropriate the surplus created by the new investment. To capture the idea we introduce the notion of reinvestment-proof equilibria in which no agent has an incentive to reinvest or to change his investment in the current firm. We show that the presence of a small inefficient firm causes substantial efficiency gains in all larger firms.
Keywords: efficient firm structure; firm formation; holdup problem; reinvestment-proof equilibria
JEL Codes: D20; D60; L20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| holdup problem (D86) | underinvestment (G31) |
| limited bargaining power (D43) | choice not to acquire firm-specific skills (D25) |
| existence of small inefficient firm (L25) | higher investment levels in larger firms (D25) |
| small inefficient firm (L25) | efficiency gains in larger firms (L25) |
| reinvestment-proof equilibria (D52) | stability in investment levels (F21) |
| firm formation process (L26) | alleviation of holdup problem (D86) |