IDEAS home Printed from https://ideas.repec.org/p/ecl/harjfk/rwp19-033.html
   My bibliography  Save this paper

The Property Rights Theory of Production Networks

Author

Listed:
  • Balbuzanov, Ivan

    (University of Melbourne)

  • Kotowski, Maciej

    (Harvard Kennedy School)

Abstract

This paper investigates the formation of production and trading networks in an economy with general interdependencies and complex property rights. The right to exclude, a core tenet of property, grants asset owners a form of monopoly power that influences granular economic interactions. Equilibrium networks reflect the distribution of these ownership claims. Inefficient production networks may endure in equilibrium as firms multi-source to mitigate hold-up risk. Short supply chains also reduce this risk, but may preclude the production of complex goods. A generalized Top Trading Cycles algorithm, applicable to a production economy, identifies equilibrium outcomes in the model. Such outcomes can be decentralized via a price system.

Suggested Citation

  • Balbuzanov, Ivan & Kotowski, Maciej, 2019. "The Property Rights Theory of Production Networks," Working Paper Series rwp19-033, Harvard University, John F. Kennedy School of Government.
    • Handle: RePEc:ecl:harjfk:rwp19-033
    as

    Download full text from publisher

    File URL: https://research.hks.harvard.edu/publications/getFile.aspx?Id=3842
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. John William Hatfield & Scott Duke Kominers & Alexandru Nichifor & Michael Ostrovsky & Alexander Westkamp, 2013. "Stability and Competitive Equilibrium in Trading Networks," Journal of Political Economy, University of Chicago Press, vol. 121(5), pages 966-1005.
    2. Bramoulle, Yann & Galeotti, Andrea & Rogers, Brian (ed.), 2016. "The Oxford Handbook of the Economics of Networks," OUP Catalogue, Oxford University Press, number 9780199948277.
    3. Hart, Oliver & Moore, John, 1990. "Property Rights and the Nature of the Firm," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1119-1158, December.
    4. Michael Kremer, 1993. "The O-Ring Theory of Economic Development," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 108(3), pages 551-575.
    5. Yann Bramoullé & Andrea Galeotti & Brian Rogers, 2016. "The Oxford Handbook of the Economics of Networks," Post-Print hal-01447842, HAL.
    6. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August.
    7. Michael Richter & Ariel Rubinstein, 2015. "Back to Fundamentals: Equilibrium in Abstract Economies," American Economic Review, American Economic Association, vol. 105(8), pages 2570-2594, August.
    8. Konishi, Hideo & Quint, Thomas & Wako, Jun, 2001. "On the Shapley-Scarf economy: the case of multiple types of indivisible goods," Journal of Mathematical Economics, Elsevier, vol. 35(1), pages 1-15, February.
    9. Kotowski, Maciej H. & Leister, C. Matthew, 2018. "Trading Networks and Equilibrium Intermediation," Working Paper Series rwp18-001, Harvard University, John F. Kennedy School of Government.
    10. R. H. Coase, 2013. "The Problem of Social Cost," Journal of Law and Economics, University of Chicago Press, vol. 56(4), pages 837-877.
    11. Carl Shapiro, 2001. "Navigating the Patent Thicket: Cross Licenses, Patent Pools, and Standard Setting," NBER Chapters, in: Innovation Policy and the Economy, Volume 1, pages 119-150, National Bureau of Economic Research, Inc.
    12. Shapley, Lloyd & Scarf, Herbert, 1974. "On cores and indivisibility," Journal of Mathematical Economics, Elsevier, vol. 1(1), pages 23-37, March.
    13. Yann Bramoullé & Andrea Galeotti & Brian Rogers, 2016. "The Oxford Handbook of the Economics of Networks," Post-Print hal-03572533, HAL.
    14. Vasco M. Carvalho & Alireza Tahbaz-Salehi, 2019. "Production Networks: A Primer," Annual Review of Economics, Annual Reviews, vol. 11(1), pages 635-663, August.
    15. Gene M. Grossman & Elhanan Helpman & Adam Szeidl, 2005. "Complementarities between Outsourcing and Foreign Sourcing," American Economic Review, American Economic Association, vol. 95(2), pages 19-24, May.
    16. Abdulkadiroglu, Atila & Sonmez, Tayfun, 1999. "House Allocation with Existing Tenants," Journal of Economic Theory, Elsevier, vol. 88(2), pages 233-260, October.
    17. John William Hatfield & Paul R. Milgrom, 2005. "Matching with Contracts," American Economic Review, American Economic Association, vol. 95(4), pages 913-935, September.
    18. Rachel E. Kranton & Deborah F. Minehart, 2000. "Networks versus Vertical Integration," RAND Journal of Economics, The RAND Corporation, vol. 31(3), pages 570-601, Autumn.
    19. Michael Ostrovsky, 2008. "Stability in Supply Chain Networks," American Economic Review, American Economic Association, vol. 98(3), pages 897-923, June.
    20. Daniele Condorelli & Andrea Galeotti & Ludovic Renou, 2017. "Bilateral Trading in Networks," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 84(1), pages 82-105.
    21. Tamás Fleiner & Ravi Jagadeesan & Zsuzsanna Jankó & Alexander Teytelboym, 2019. "Trading Networks With Frictions," Econometrica, Econometric Society, vol. 87(5), pages 1633-1661, September.
    22. Klein, Benjamin & Crawford, Robert G & Alchian, Armen A, 1978. "Vertical Integration, Appropriable Rents, and the Competitive Contracting Process," Journal of Law and Economics, University of Chicago Press, vol. 21(2), pages 297-326, October.
    23. Williamson, Oliver E, 1971. "The Vertical Integration of Production: Market Failure Considerations," American Economic Review, American Economic Association, vol. 61(2), pages 112-123, May.
    24. Rachel E. Kranton & Deborah F. Minehart, 2001. "A Theory of Buyer-Seller Networks," American Economic Review, American Economic Association, vol. 91(3), pages 485-508, June.
    25. Matthew Elliott, 2015. "Inefficiencies in Networked Markets," American Economic Journal: Microeconomics, American Economic Association, vol. 7(4), pages 43-82, November.
    26. Charles I. Jones, 2011. "Intermediate Goods and Weak Links in the Theory of Economic Development," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(2), pages 1-28, April.
    27. Douglas M. Gale & Shachar Kariv, 2007. "Financial Networks," American Economic Review, American Economic Association, vol. 97(2), pages 99-103, May.
    28. Mihai Manea, 2018. "Intermediation and Resale in Networks," Journal of Political Economy, University of Chicago Press, vol. 126(3), pages 1250-1301.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Kariv, Shachar & Kotowski, Maciej H. & Leister, C. Matthew, 2018. "Liquidity risk in sequential trading networks," Games and Economic Behavior, Elsevier, vol. 109(C), pages 565-581.
    2. Kotowski, Maciej H. & Leister, C. Matthew, 2018. "Trading Networks and Equilibrium Intermediation," Working Paper Series rwp18-001, Harvard University, John F. Kennedy School of Government.
    3. Ivan Balbuzanov & Maciej H. Kotowski, 2019. "Endowments, Exclusion, and Exchange," Econometrica, Econometric Society, vol. 87(5), pages 1663-1692, September.
    4. Robert Gibbons & John Roberts, 2012. "The Handbook of Organizational Economics," Economics Books, Princeton University Press, edition 1, volume 1, number 9889.
    5. Ilya Segal & Michael D.Whinston, 2012. "Property Rights [The Handbook of Organizational Economics]," Introductory Chapters,, Princeton University Press.
    6. Cho, Myeonghwan, 2021. "Trading networks of price-taking buyers and sellers," Journal of Economic Theory, Elsevier, vol. 196(C).
    7. Goyal, S., 2016. "Networks and Markets," Cambridge Working Papers in Economics 1652, Faculty of Economics, University of Cambridge.
    8. Scott Duke Kominers & Alexander Teytelboym & Vincent P Crawford, 2017. "An invitation to market design," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 33(4), pages 541-571.
    9. repec:zbw:bofrdp:2017_020 is not listed on IDEAS
    10. Williamson, Oliver E., 2010. "Transaction Cost Economics: The Natural Progression," Journal of Retailing, Elsevier, vol. 86(3), pages 215-226.
    11. Chen, J. & Elliott, M. & Koh, A., 2020. "Capability Accumulation and Conglomeratization in the Information Age," Cambridge Working Papers in Economics 2069, Faculty of Economics, University of Cambridge.
    12. Choi, S. & Goyal, S. & Moisan, F., 2020. "Brokerage Rents and Intermediation Networks," Cambridge Working Papers in Economics 2005, Faculty of Economics, University of Cambridge.
    13. Darcy W E Allen, 2020. "When Entrepreneurs Meet:The Collective Governance of New Ideas," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number q0269, January.
    14. Tamás Fleiner & Ravi Jagadeesan & Zsuzsanna Jankó & Alexander Teytelboym, 2019. "Trading Networks With Frictions," Econometrica, Econometric Society, vol. 87(5), pages 1633-1661, September.
    15. Matsushima, Noriaki & Shinohara, Ryusuke, 2014. "What factors determine the number of trading partners?," Journal of Economic Behavior & Organization, Elsevier, vol. 106(C), pages 428-441.
    16. Mark Casson & Nigel Wadeson, 2012. "Internationalisation Theory," Chapters, in: Michael Dietrich & Jackie Krafft (ed.), Handbook on the Economics and Theory of the Firm, chapter 15, Edward Elgar Publishing.
    17. Macchiavello, Rocco & Miquel-Florensa, Josepa, 2017. "Vertical Integration and Relational Contracts: Evidence from the Costa Rica Coffee Chain," CEPR Discussion Papers 11874, C.E.P.R. Discussion Papers.
    18. Itkonen, Juha, 2017. "Efficiency and dependency in a network of linked permit markets," Bank of Finland Research Discussion Papers 20/2017, Bank of Finland.
    19. Matthew O. Jackson & Brian W. Rogers & Yves Zenou, 2016. "Networks: An Economic Perspective," Papers 1608.07901, arXiv.org.
    20. Syngjoo Choi & Andrea Galeotti & Sanjeev Goyal, 2017. "Trading in Networks: Theory and Experiments," Journal of the European Economic Association, European Economic Association, vol. 15(4), pages 784-817.
    21. Itkonen, Juha, 2017. "Efficiency and dependency in a network of linked permit markets," Research Discussion Papers 20/2017, Bank of Finland.

    More about this item

    JEL classification:

    • C71 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Cooperative Games
    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ecl:harjfk:rwp19-033. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/ksharus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.