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The Organization of the Firm


Headline: Korean Firm Invests 30 Trillion Won To Vertically Integrate

I.

Introduction

II.

Methods of Procuring Inputs

A.

Purchase the Inputs Using Spot Exchange

B.

Acquire Inputs under a Contract

C.

Produce the Inputs Internally

III.

Transaction Costs

A.

Types of Specialized Investments

1.

Site Specificity

2.

Physical-Asset Specificity

3.

Dedicated Assets

4.

Human Capital

B.

Implications of Specialized Investments

1.

Costly Bargaining

2.

Underinvestment

3.

Opportunism and the "Hold-Up Problem"

IV.

Optimal Input Procurement

A.

Spot Exchange

B.

Contracts

C.

Vertical Integration

D.

The Economic Trade-Off

V.

Managerial Compensation and the Principal-Agent Problem

VI.

Forces that Discipline Managers

A.

Incentive Contracts

B.

External Incentives

1.

Reputation

2.

Takeovers

VII.

The Manager-Worker Principal-Agent Problem

A.

Solutions to the Manager-Worker Principal-Agent Problem

1.

Profit Sharing

2.

Revenue Sharing

3.

Piece Rates

4.

Time Clocks and Spot Checks

VIII.

Answering the Headline

IX.

Summary

X.

Key Terms and Concepts

XI.

Conceptual and Computational Questions

XII.

Problems and Applications

XIII.

Case-Based Exercises

XIV.

Selected Readings

XV.

Appendix: An Indifference Curve Approach to Managerial Incentives









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