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Ownership, incentives, and the hold‐up problem
Author(s) -
Baldenius Tim
Publication year - 2006
Publication title -
the rand journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.687
H-Index - 108
eISSN - 1756-2171
pISSN - 0741-6261
DOI - 10.1111/j.1756-2171.2006.tb00016.x
Subject(s) - incentive , vertical integration , profit sharing , microeconomics , profit (economics) , cash , industrial organization , business , economics , division of labour , finance , market economy
Vertical integration is often proposed as a way to resolve hold‐up problems. This ignores the empirical fact that division managers tend to maximize divisional (not firmwide) profit when investing. I develop a model with asymmetric information at the bargaining stage and investment returns taking the form of cash and “empire benefits.” Owners of a vertically integrated firm will then provide division managers with low‐powered incentives to induce them to bargain more cooperatively, resulting in higher investments and overall profit as compared with nonintegration. Vertical integration therefore mitigates hold‐up problems even without profit sharing .