Mergers, Employee Hold-Up and the Scope of the Firm: An Intrafirm Bargaining Approach to Mergers

Abstract

We explore the scope of the firm in a setting where employee wage contracts are nonbinding and firms cannot contract with one another on their respective employment decisions. Specifically, we consider two divisions that have scope for beneficial interaction, and examine whether it is best for them, given this incomplete contracting environment, to produce jointly within the same firm or to interact over the market. Employing a multilateral bargaining framework, we analyze how employee wages, firm profits and employment levels are altered by merger when employees have some hold-up power. Among other results, our analysis suggests that merged production is more likely when the optimal contributions by the two firms to joint production are more unequal (leading to productive and bargaining externalities), while nonintegration is more likely the greater the productive gains to joint interaction between the firms (despite such gains being equally realizable under both merger and nonintegration).