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

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Grossman, Sanford J
Hart, Oliver

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Abstract

What determines how integrated a firm is? We emphasize the benefits of "control" when there are difficulties in writing complete contracts. We define the firm as being composed of its assets. We present a theory of costly contracts which emphasizes that contractual rights can be of two types: specific rights and residual rights. When it is too 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. We show that there can be costs associated with the wrong allocation of residual rights.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 70.

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Date of creation: Jul 1985
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Handle: RePEc:cpr:ceprdp:70

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Keywords: Contracts Horizontal Integration Theory of the Firm Vertical Integration

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This page was last updated on 2008-7-25.

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