The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration

@article{Grossman1986TheCA,
  title={The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration},
  author={Sanford J. Grossman and Oliver Hart},
  journal={Journal of Political Economy},
  year={1986},
  volume={94},
  pages={691-719}
}
Our theory of costly contracts emphasizes that contractual rights can be of two types: specific rights and residual rights. When it is costly to list all specific rights over assets in the contract, it may be optimal to let one party purchase all residual rights. Ownership is the purchase of these residual rights. When residual rights are purchased by one party, they are lost by a second party, and this inevitably creates distortions. Firm 1 purchases firm 2 when firm 1's control increases the… 
View via Publisher
dash.harvard.edu
8,803 Citations
Highly Influential Citations
497
Background Citations
3,168
Methods Citations
452
Results Citations
118

Figures and Tables from this paper

8,803 Citations

Citation Type

Citation Type

Transaction Costs and the Property Rights Approach to the Theory of the Firm
The standard property rights approach is focused on ex ante investment incentives, while there are no transaction costs that might restrain ex post negotiations. We explore the implications of such…
A Theory of Joint Asset Ownership
I offer a theory of joint ownership by extending the standard property right theory of the firm to situations where parties can endogenously choose the degree of specificity of their investments…
Appropriability, Investment Incentives and the Property Rights Theory of the Firm
This paper examines the property rights theory of the firm when a manager's relationship-specific investment can be partially appropriated by the owner of an asset when cooperation breaks down. For…
Ownership and Cost‐Sharing Contracts
We discuss the relative merits of public and private ownership in an incomplete contract framework developed by Hart, Shleifer and Vishney (HSV). We add two new elements to their model. First, the…
The Boundaries of the Firm Revisited
Both transaction cost-economics and property-rights theories offer explanations of the boundaries of the firm based on ideas of ex post bargaining and holdup. These theories are quite distinct in…
The Costs and Benefits of Privatization: An Incomplete Contracts Approach
This article develops a model of privatization using an incomplete contracts approach. We argue that different allocations of ownership rights lead to different allocations of inside information…
Bargaining, Bonding, and Partial Ownership
This article provides a theory of interfirm partial ownership. We consider a setting in which an upstream firm can make two alternative types of investment: either specific investment that only a…
Inside vs. Outside Ownership - a Political Theory of the Firm
If contracting within the firm is incomplete, managers will expend resources on trying to appropriate a share of the surplus that is generated. We show that outside ownership may alleviate the…
Towards a Formal Model of the Transaction Cost Theory of the Firm
This paper attempts to formalize the transaction cost theory of the firm. Building on the formal approach of Grossman and Hart (1986), a model is developed to capture the essential elements of the…
Asymmetric Information and the Property Rights Approach to the Theory of the Firm
In the Grossman-Hart-Moore property rights approach to the theory of the firm, it is usually assumed that information is symmetric. Ownership matters for investment incentives, provided that…
...
1
2
3
4
5
...

References

SHOWING 1-10 OF 45 REFERENCES
Vertical Integration and the Distribution of Property Rights
What is a firm? What are the determinants of how vertically integrated are the activities of the firm? This paper builds on the foundations laid by Coase (1937), Williamson (1979) and Klein et al.…
Vertical Integration, Appropriable Rents, and the Competitive Contracting Process
The potential of post-contractural apportunistic behavior for improving market efficiency through intrafirm rather than interfirm transactions is examined under the assumption that vertical costs…
The Internal Organization of the Firm and the Shape of Average Costs
Do costs of coordination limit the size of firms? Do they lead to rising average costs at high output levels? A simple model of a firm which employs production and administrative labor, and where…
Investment and Wages in the Absence of Binding Contracts: A Nash Bargining Approach
The paper uses a generalized Nash bargain to analyze input levels, profits, and wages in the absence of binding contracts, and compares these with the convenitional binding contracts model. It is…
ECONOMIES OF SCOPE AND THE SCOPE OF THE ENTERPRISE
Abstract This paper examines elements of an efficiency-based theory of the multiproduct firm. The theoretical framework developed by Williamson to explain vertical integration is extended to explain…
Authority, Control, and the Distribution of Earnings
The distributions of firm size, span of control, and managerial incomes are modeled as the joint outcome of market assignments of personnel to hierarchical positions. Assigning persons of superior…
Incomplete Contracts and Renegotiation
When drawing up a contract, it is often impracticable to specify all the relevant contingencies, and so contracts are typically incomplete. This paper considers the extent to which these gaps migh t…
Vertical integration and communication
Among the many possible motives for vertical integration, the one emphasized here is uncertainty in the supply of the upstream good and the consequent need for information by downstream firms. The…
The Nature of the Firm
Economic theory has suffered in the past from a failure to state clearly its assumptions. Economists in building up a theory have often omitted to examine the foundations on which it was erected.…
Understanding the employment relation: the analysis of idiosyncratic exchange
This paper is concerned with jobs for which nontrivial job-specific skills and task-specific knowledge evolve, in a learning by doing fashion, during the course of a worker's employment. Otherwise…
...
1
2
3
4
5
...