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Transaction costs and the property rights approach to the theory of the firm

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  • Müller, Daniel
  • Schmitz, Patrick W.

Abstract

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 transaction costs. Prominent conclusions of the property rights theory may be overturned: A party may have stronger investment incentives when a non-investing party is the owner, and joint ownership can be the uniquely optimal ownership structure. Intuitively, an ownership structure that is unattractive in the standard model may now be desirable, because it implies large gains from trade, such that the parties are more inclined to incur the transaction costs.

Suggested Citation

  • Müller, Daniel & Schmitz, Patrick W., 2016. "Transaction costs and the property rights approach to the theory of the firm," European Economic Review, Elsevier, vol. 87(C), pages 92-107.
    • Handle: RePEc:eee:eecrev:v:87:y:2016:i:c:p:92-107
    DOI: 10.1016/j.euroecorev.2016.04.013
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    Cited by:

    1. Schmitz, Patrick W., 2019. "Incomplete contracts, limited liability, and the optimality of joint ownership," Economics Letters, Elsevier, vol. 183(C), pages 1-1.
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    3. Mori, Yusuke, 2020. "Ex ante investment, ex post adaptation, and joint ownership," Economics Letters, Elsevier, vol. 187(C).
    4. Valeria Gattai & Piergiovanna Natale, 2017. "A New Cinderella Story: Joint Ventures And The Property Rights Theory Of The Firm," Journal of Economic Surveys, Wiley Blackwell, vol. 31(1), pages 281-302, February.
    5. Schmitz, Patrick W., 2023. "Completely relationship-specific investments, transaction costs, and the property rights theory," Economics Letters, Elsevier, vol. 226(C).
    6. Schmitz, Patrick W., 2016. "The negotiators who knew too much: Transaction costs and incomplete information," Economics Letters, Elsevier, vol. 145(C), pages 33-37.
    7. Ram Singh, 2018. "Public–private partnerships vs. traditional contracts for highways," Indian Economic Review, Springer, vol. 53(1), pages 29-63, December.
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    9. Carmine Guerriero, 2023. "Property rights, transaction costs, and the limits of the market," Economics of Governance, Springer, vol. 24(2), pages 143-176, June.
    10. Valeria Gattai & Piergiovanna Natale, 2014. "Joint Ventures and the Property Rights Theory of the Firm: a Review of the Literature," Working Papers 287, University of Milano-Bicocca, Department of Economics, revised Dec 2014.

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    More about this item

    Keywords

    Incomplete contracts; Property rights approach; Vertical integration; Joint ownership; Transaction costs;
    All these keywords.

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures

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