AGENCY COSTS AND THE LIMITS OF INTEGRATION

In this article I identify a type of integration cost that is associat ed with agency relations within the firm. This cost arises when the fi rm's principal cannot fully commit to long-term contracts with the fir m's agents, and these agents have private information. In the model, i ntegration can lead to value enhancements through the realization of c omplementarity gains. But this will also lend to larger rents, which i s costly for the principal. I show that this type of cost may be suffi ciently large to act as an effective limit for integrations that are o therwise profitable.