A Formal Haggling Theory of Firm Boundaries: a Tradeoff Between Bargaining Costs and Too Much Intervention
Abstract: This study aims to provide a formal haggling theory of firm boundaries. In the face of unforeseen disturbances in trade circumstances, trading parties engage in ex post contract renegotiation, which ends with agreement, disagreement, or third-party intervention. Given that third-party intervention under integration (i.e., fiat) is more efficient than that under non-integration (i.e., court ordering), we show that integration can economize bargaining costs but that it suffers from too much intervention. This tradeoff provides a formal explanation of why selective intervention fails.