Journal Article

The Agency Cost of Internal Collusion and Schumpeterian Growth

David Martimort and Thierry Verdier

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 71, issue 4, pages 1119-1141
Published in print October 2004 | ISSN: 0034-6527
Published online October 2004 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/0034-6527.00316
The Agency Cost of Internal Collusion and Schumpeterian Growth

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This paper analyses the link between the internal organization of the firm and the growth process. We present a Schumpeterian growth model in which monopoly firms face agency costs due to collusion between managers inside the organization. These costs affect incentives to invest and the rate of innovation in the economy. When collusion is self-enforcing, higher growth and more creative destruction shortens in turn the time horizon of colluding agents in the organization and makes internal collusion more difficult to sustain. We analyse this two-way mechanism between growth and agency problems and show how the transaction costs of side-contracting within the firm and the growth rate of the economy are simultaneously derived.

Keywords: D23; D42; L12; O41

Journal Article.  10999 words.  Illustrated.

Subjects: Economic Growth and Aggregate Productivity ; Production and Organizations ; Market Structure, Firm Strategy, and Market Performance ; Market Structure and Pricing

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