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

  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},
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… 

Figures and Tables from this paper

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

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

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

Incomplete Contracts, Limited Liability, and the Optimality of Joint Ownership




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

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

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

Hierarchical Control and Optimum Firm Size

There is a great deal of evidence that almost all organizational structures tend to produce false images in the decision-maker, and that the larger and more authoritarian the organization, the better