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

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  • Oliver Hart
  • Sanford Grossman

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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Bibliographic Info

Paper provided by Massachusetts Institute of Technology (MIT), Department of Economics in its series Working papers with number 372.

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Date of creation: Apr 1985
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Handle: RePEc:mit:worpap:372

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Postal: MASSACHUSETTS INSTITUTE OF TECHNOLOGY (MIT), DEPARTMENT OF ECONOMICS, 50 MEMORIAL DRIVE CAMBRIDGE MASSACHUSETTS 02142 USA
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References

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  1. Rubinstein, Ariel, 1982. "Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, vol. 50(1), pages 97-109, January.
  2. Sherwin Rosen, 1982. "Authority, Control, and the Distribution of Earnings," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 311-323, Autumn.
  3. Waldman, Michael, 1984. "Worker Allocation, Hierarchies and the Wage Distribution," Review of Economic Studies, Wiley Blackwell, vol. 51(1), pages 95-109, January.
  4. Michael Keren & David Levhari, 1983. "The Internal Organization of the Firm and the Shape of Average Costs," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 474-486, Autumn.
  5. Kenneth J. Arrow, 1975. "Vertical Integration and Communication," Bell Journal of Economics, The RAND Corporation, vol. 6(1), pages 173-183, Spring.
  6. Williamson, Oliver E, 1983. "Credible Commitments: Using Hostages to Support Exchange," American Economic Review, American Economic Association, vol. 73(4), pages 519-40, September.
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  1. Харт, Оливер in Wikipedia Russian ne '')
  2. Гроссман, Сэнфорд in Wikipedia Russian ne '')

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