G604, Tirole-Coasle, size of firms, march 28, 2006
Coase, Theory of the Firm, Tirole
chapter 0
Eric Rasmusen, [email protected]
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Classics: Organization
R. H. Coase (1937) "The Nature of the
Firm," Economica, New Series, 4, 16: 386405 (November 1937)
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Coase (1937)
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Transaction Costs
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Using Marginalism
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Master and Servant
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The last part of Coase is about authority.
The principal commands the agent.
Why is the principal the entrepreneur and
not the worker? (not in Coase)
Why does the residual claimant have the
authority? (not in Coase)
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Tirole
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Top person in theoretical IO, I’d say. He
writes books a lot. Toulouse, MIT.
p. 20. Why do economies of scale have to
be exploited within the firm?
This relates to Coase (1937)
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Why Not One Big Firm?
Williamson’s Puzzle of Selective Intervention: why
not merge two firms and then manage them just
the same as before? (p. 21)
One answer: we cannot contract to make the CEO
of each firm a residual claimant.
Think of Holmstrom’s Teams model (1982).
Rasmusen and Zenger, ``Diseconomies of Scale in Employment
Contracts,'' Journal of Law, Economics and Organization (June
1990), 6(1): 65-92 .
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Bargaining Power (Rasmusen)
Two possible meanings:
1. The threat point (Apex gets 2, Brydox
gets 8) vs. (Apex gets 7, Brydox gets 3)
2. The division of surplus (Apex gets 100%,
Brydox gets 0%) vs. (Apex gets 20%,
Brydox gets 80%)
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Bargaining: Why the Coase
Theorem Breaks Down (pp. 22-24)
(2) Nature chooses buyer value v using density f(v) on [a,b] with seller
cost c in (a,b). The buyer observes this.
(3) The seller offers price p to the buyer.
(4) The buyer accepts or rejects.
This leads to inefficiency–-the Myerson-Satterthwaite problem.
Seller proposing an offer at (1) would not help.
Merging at (1) would help. So we should put buyer and seller in the
same firm.
OR: give all the bargaining power to the informed party, e.g. the
contract at time (1) gives a lump sum X to the seller and gives
the buyer the right to buy 0 or 1 unit at price p=c (an option
contract) OR use a fancy mechanism (footnote 29)
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Asset Specificity/The Hold-Up
Problem (p. 24)
(1) The buyer value is v=3. The seller can invest 2 to get c=0 or not
invest, to keep c=4.
(2) The buyer offers price p to the seller. (or, use 50-50 split)
(3) The seller accepts or rejects.
This leads to investment of 0.
The buyer proposing an offer at (0) *would* help.
Merging at (0) would help too. So we should put buyer and seller in the
same firm.
OR: give all the bargaining power to the investing party, i.e. the seller
here.
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Asset Specificity/The Hold-Up
Problem Example (p. 28)
Joskow found that when coal quality is
diverse, not many transportation
methods, and few mines, then longterm contracts will be used (West US)
In the opposite case, short-term contracts
(spot markets) are used (East US)
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Authority (p. 30)
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Authority changes the threat point in
bargaining. It changes, in a sense,
bargaining power.
Think of the UN Security Council. Suppose
Russia and France do not care about
Rwanda policy, but the US does. Is the
effect of giving them veto power over US
policy to change US policy?
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Unconstrained Bargaining (pp. 3132)
(0) The buyer and seller have made a basic contract.
(1) The buyer invests I=x^2/2 in researching a new
feature that will cost the seller c to produce.
(2) The buyer value of the new feature is v>c with
probability x and 0 otherwise.
(3) Buyer and seller bargain for a price p for the
feature. If they disagree, the new feature is not
added to the product.
Assume: bargaining splits the gains from agreement.
Result: Underinvestment
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Seller Has Authority to Make
Changes ( p. 32)
(0) The buyer and seller have made a basic contract.
(1) The buyer invests I=x^2/2 in researching a new
feature that will cost the seller c to produce.
(2)The buyer value of the new feature is v>c with
probability x and 0 otherwise.
(2.5) The seller decides whether to add the new
feature to the product.
(3) Buyer and seller bargain for a price p for the
feature. The feature is added only if the seller
agrees to add it.
Assume: bargaining splits the gains from agreement.
Result: Underinvestment
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Buyer Has Authority to Make
Changes ( pp. 32-33)
(0) The buyer and seller have made a basic contract.
(1) The buyer invests I=x^2/2 in researching a new
feature that will cost the seller c to produce.
(2)The buyer value of the new feature is v>c with
probability x and 0 otherwise.
(2.5) The buyer decides whether to add the new
feature to the product.
(3) Buyer and seller bargain over whether the new
feature is to be added. The decision is ultimately
up to the buyer.
Assume: bargaining splits the gains from agreement.
Result: Overinvestment
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What if the New Feature Might Be
Actually a Negative?
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We can run that model with probability x
of value v>c and probability (1-x) of value
–y<0 too. Then, buyer authority does not
result in overinvestment, I think--- for
reasons elucidated in Lyon and
Rasmusen,
“Buyer-Option Contracts,
Renegotiation, and the Hold-Up Problem,'‘
Journal of Law, Economics and
Organization, 20,1: 148-169 (April 2004)
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A link to the course website
http://www.rasmusen.org/g604/0.g604.htm
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