A Theory of the Firm based on Haggling, Coordination and Rent-Seeking∗

Two agents want to coordinate their decisions but may also try to extract rents from each other. Decisions are negotiated at the interim stage, when the agents have private information. The agent who owns an asset has the right to make a unilateral decision regarding this asset, so negotiations must satisfy a participation constraint. We compare nonintegration, where each agent owns one asset, with integration, where one agent owns both assets. We derive simple necessary and suffi cient conditions for the first best to be implemented with integration or nonintegration. These conditions can never be satisfied simultaneously, so integration sometimes dominates nonintegration and vice versa.