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Power in a Theory of the Firm

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  • Rajan, Raghuram G
  • Zingales, Luigi

Abstract

Transactions take place in the firm rather than in the market because the firm offers agents who make specific investments power. Past literature emphasizes the allocation of ownership as the primary mechanism by which the firm does this. Within the contractibility assumptions of this literature, we identify a potentially superior mechanism, the regulation of access to critical resources. Access can be better than ownership because: i) the power agents get from access is more contingent on them making the right investment; ii) ownership has adverse effects on the incentive to specialize. The theory explains the importance of internal organization and third-party ownership.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1777.

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Date of creation: Jan 1998
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Handle: RePEc:cpr:ceprdp:1777

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Related research

Keywords: Incomplete Contracts; Theory of the Firm; Vertical Integration;

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