IDEAS home Printed from https://ideas.repec.org/a/eee/eecrev/v87y2016icp92-107.html
   My bibliography  Save this article

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

Author

Listed:
  • 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
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0014292116300848
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.euroecorev.2016.04.013?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Chiu, Y. Stephen & Rachel Yang, B., 1999. "The outside option, threat point, and Nash bargaining solution," Economics Letters, Elsevier, vol. 62(2), pages 181-188, February.
    2. Oliver Hart & John Moore, 2008. "Contracts as Reference Points," The Quarterly Journal of Economics, Oxford University Press, vol. 123(1), pages 1-48.
    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. Eric Malin & David Martimort, 2000. "Transaction Costs and Incentive Theory," Revue d'Économie Industrielle, Programme National Persée, vol. 92(1), pages 125-148.
    5. Williamson, Oliver, 2009. "The Theory of the Firm as Governance Structure: From Choice to Contract," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 6, pages 111-134, December.
    6. Oliver Hart, 2011. "Thinking about the Firm: A Review of Daniel Spulber's The Theory of the Firm," Journal of Economic Literature, American Economic Association, vol. 49(1), pages 101-113, March.
    7. Muthoo,Abhinay, 1999. "Bargaining Theory with Applications," Cambridge Books, Cambridge University Press, number 9780521576475, December.
    8. Maija Halonen, 2002. "Reputation And The Allocation Of Ownership," Economic Journal, Royal Economic Society, vol. 112(481), pages 539-558, July.
    9. Maija Halonen-Akatwijuka & Evagelos Pafilis, 2009. "Reputation and Ownership of Public Goods," The Centre for Market and Public Organisation 09/211, The Centre for Market and Public Organisation, University of Bristol, UK.
    10. Luca Anderlini & Leonardo Felli, 2006. "Transaction Costs and the Robustness of the Coase Theorem," Economic Journal, Royal Economic Society, vol. 116(508), pages 223-245, January.
    11. Anderlini, Luca & Felli, Leonardo, 2001. "Costly Bargaining and Renegotiation," Econometrica, Econometric Society, vol. 69(2), pages 377-411, March.
    12. Steven Tadelis & Oliver E.Williamson, 2012. "Transaction Cost Economics," Introductory Chapters, in: Robert Gibbons & John Roberts (ed.),: The Handbook of Organizational Economics, Princeton University Press.
    13. 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.
    14. Rosenkranz, Stephanie & Schmitz, Patrick W., 2003. "Optimal allocation of ownership rights in dynamic R&D alliances," Games and Economic Behavior, Elsevier, vol. 43(1), pages 153-173, April.
    15. Brousseau,Eric & Glachant,Jean-Michel (ed.), 2002. "The Economics of Contracts," Cambridge Books, Cambridge University Press, number 9780521814904, December.
    16. Goldlücke, Susanne & Schmitz, Patrick W., 2014. "Investments as signals of outside options," Journal of Economic Theory, Elsevier, vol. 150(C), pages 683-708.
    17. David de Meza & Ben Lockwood, 1998. "Does Asset Ownership Always Motivate Managers? Outside Options and the Property Rights Theory of the Firm," The Quarterly Journal of Economics, Oxford University Press, vol. 113(2), pages 361-386.
    18. Benoit, Jean-Pierre & Krishna, Vijay, 1993. "Renegotiation in Finitely Repeated Games," Econometrica, Econometric Society, vol. 61(2), pages 303-323, March.
    19. Oliver Hart & Andrei Shleifer & Robert W. Vishny, 1997. "The Proper Scope of Government: Theory and an Application to Prisons," The Quarterly Journal of Economics, Oxford University Press, vol. 112(4), pages 1127-1161.
    20. Gattai, Valeria & Natale, Piergiovanna, 2013. "What makes a joint venture: Micro-evidence from Sino-Italian contracts," Review of Financial Economics, Elsevier, vol. 22(4), pages 194-205.
    21. Fabian Herweg & Klaus M. Schmidt, 2015. "Loss Aversion and Inefficient Renegotiation," Review of Economic Studies, Oxford University Press, vol. 82(1), pages 297-332.
    22. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817, November.
    23. Patrick W. Schmitz, 2006. "Information Gathering, Transaction Costs, and the Property Rights Approach," American Economic Review, American Economic Association, vol. 96(1), pages 422-434, March.
    24. Michael D. Whinston, 2003. "On the Transaction Cost Determinants of Vertical Integration," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 19(1), pages 1-23, April.
    25. Oxley, Joanne E, 1997. "Appropriability Hazards and Governance in Strategic Alliances: A Transaction Cost Approach," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 13(2), pages 387-409, October.
    26. Ernst Fehr & Oliver Hart & Christian Zehnder, 2011. "Contracts as Reference Points--Experimental Evidence," American Economic Review, American Economic Association, vol. 101(2), pages 493-525, April.
    27. Kurt Annen, 2009. "Efficiency out of disorder: Contested ownership in incomplete contracts," RAND Journal of Economics, RAND Corporation, vol. 40(4), pages 597-610, December.
    28. Oliver Hart, 2009. "Hold-up, Asset Ownership, and Reference Points," The Quarterly Journal of Economics, Oxford University Press, vol. 124(1), pages 267-300.
    29. Brousseau,Eric & Glachant,Jean-Michel (ed.), 2002. "The Economics of Contracts," Cambridge Books, Cambridge University Press, number 9780521893138, December.
    30. George Baker & Robert Gibbons & Kevin J. Murphy, 2002. "Relational Contracts and the Theory of the Firm," The Quarterly Journal of Economics, Oxford University Press, vol. 117(1), pages 39-84.
    31. Schmitz, Patrick W., 2008. "Joint ownership and the hold-up problem under asymmetric information," Economics Letters, Elsevier, vol. 99(3), pages 577-580, June.
    32. Ernst Fehr & Oliver Hart & Christian Zehnder, 2008. "Contracts as reference points � experimental evidence," IEW - Working Papers 393, Institute for Empirical Research in Economics - University of Zurich.
    33. Bengt Holmstrom & John Roberts, 1998. "The Boundaries of the Firm Revisited," Journal of Economic Perspectives, American Economic Association, vol. 12(4), pages 73-94, Fall.
    34. Chiu, Y Stephen, 1998. "Noncooperative Bargaining, Hostages, and Optimal Asset Ownership," American Economic Review, American Economic Association, vol. 88(4), pages 882-901, September.
    35. repec:dau:papers:123456789/12331 is not listed on IDEAS
    36. Robert Gibbons, Editor & John Roberts, Editor, 2012. "The Handbook of Organizational Economics," Economics Books, Princeton University Press, edition 1, number 9889.
    37. 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.
    38. Ilya Segal & Michael D.Whinston, 2012. "Property Rights," Introductory Chapters, in: Robert Gibbons & John Roberts (ed.),: The Handbook of Organizational Economics, Princeton University Press.
    39. Joanne E. Oxley & Rachelle C. Sampson, 2004. "The scope and governance of international R&D alliances," Strategic Management Journal, Wiley Blackwell, vol. 25(8‐9), pages 723-749, August.
    40. Cai, Hongbin, 2003. "A Theory of Joint Asset Ownership," RAND Journal of Economics, The RAND Corporation, vol. 34(1), pages 63-77, Spring.
    41. Bernheim, B. Douglas & Peleg, Bezalel & Whinston, Michael D., 1987. "Coalition-Proof Nash Equilibria I. Concepts," Journal of Economic Theory, Elsevier, vol. 42(1), pages 1-12, June.
    42. repec:hrv:faseco:30727607 is not listed on IDEAS
    43. Pisano, Gary P, 1989. "Using Equity Participation to Support Exchange: Evidence from the Biotechnology Industry," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 5(1), pages 109-126, Spring.
    44. repec:hrv:faseco:34728601 is not listed on IDEAS
    45. Rachelle C. Sampson, 2004. "The Cost of Misaligned Governance in R&D Alliances," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 20(2), pages 484-526, October.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    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.
    2. 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.
    3. Schmitz, Patrick W., 2016. "The negotiators who knew too much: Transaction costs and incomplete information," Economics Letters, Elsevier, vol. 145(C), pages 33-37.
    4. Müller, Daniel & Schmitz, Patrick W., 2017. "Optimal ownership of public goods in the presence of transaction costs," Economics Letters, Elsevier, vol. 152(C), pages 88-92.
    5. Reza Bandarian, 2020. "Explaining the competitive advantage in strategic research and technology management for research and technology organisations," International Journal of Business Continuity and Risk Management, Inderscience Enterprises Ltd, vol. 10(1), pages 23-46.
    6. Mori, Yusuke, 2020. "Ex ante investment, ex post adaptation, and joint ownership," Economics Letters, Elsevier, vol. 187(C).
    7. Ram Singh, 2018. "Public–private partnerships vs. traditional contracts for highways," Indian Economic Review, Springer, vol. 53(1), pages 29-63, December.
    8. C. Guerriero, 2017. "Property Rights, Transaction Costs, and the Limits of the Market," Working Papers wp1110, Dipartimento Scienze Economiche, Universita' di Bologna.
    9. 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.

    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. 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.
    2. Schmitz, Patrick W., 2015. "Government versus private ownership of public goods: The role of bargaining frictions," Journal of Public Economics, Elsevier, vol. 132(C), pages 23-31.
    3. Schmitz, Patrick W., 2017. "Incomplete contracts, shared ownership, and investment incentives," Journal of Economic Behavior & Organization, Elsevier, vol. 144(C), pages 153-165.
    4. Patrick W. Schmitz, 2006. "Information Gathering, Transaction Costs, and the Property Rights Approach," American Economic Review, American Economic Association, vol. 96(1), pages 422-434, March.
    5. Schmitz, Patrick W., 2010. "Contractual solutions to hold-up problems with quality uncertainty and unobservable investments," Journal of Mathematical Economics, Elsevier, vol. 46(5), pages 807-816, September.
    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. Kusterer, David J. & Schmitz, Patrick W., 2018. "Government versus Private Ownership of Public Goods: Experimental Evidence," CEPR Discussion Papers 13204, C.E.P.R. Discussion Papers.
    8. 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.
    9. Halonen-Akatwijuka, Maija & Pafilis, Evagelos, 2020. "Common ownership of public goods," Journal of Economic Behavior & Organization, Elsevier, vol. 180(C), pages 555-578.
    10. Schmitz, Patrick W., 2014. "Optimal ownership of public goods reconsidered," Economics Letters, Elsevier, vol. 125(1), pages 21-24.
    11. Schmitz, Patrick W., 2021. "Optimal ownership of public goods under asymmetric information," Journal of Public Economics, Elsevier, vol. 198(C).
    12. Halonen-Akatwijuka, Maija, 2012. "Nature of human capital, technology and ownership of public goods," Journal of Public Economics, Elsevier, vol. 96(11), pages 939-945.
    13. Schmitz, Patrick W., 2021. "On the optimality of outsourcing when vertical integration can mitigate information asymmetries," Economics Letters, Elsevier, vol. 202(C).
    14. Bernard Baudry & Virgile Chassagnon, 2012. "The vertical network organization as a specific governance structure: what are the challenges for incomplete contracts theories and what are the theoretical implications for the boundaries of the (hub," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 16(2), pages 285-303, May.
    15. Schmitz, Patrick W., 2013. "Investments in physical capital, relationship-specificity, and the property rights approach," Economics Letters, Elsevier, vol. 119(3), pages 336-339.
    16. Kusterer, David J. & Schmitz, Patrick W., 2017. "The management of innovation: Experimental evidence," Games and Economic Behavior, Elsevier, vol. 104(C), pages 706-725.
    17. Kusterer, David J. & Schmitz, Patrick W., 2020. "Public goods, property rights, and investment incentives: An experimental investigation," Journal of Economic Behavior & Organization, Elsevier, vol. 177(C), pages 514-532.
    18. Ilya Segal & Michael D.Whinston, 2012. "Property Rights," Introductory Chapters, in: Robert Gibbons & John Roberts (ed.),: The Handbook of Organizational Economics, Princeton University Press.
    19. Dessein, Wouter, 2012. "Incomplete Contracts and Firm Boundaries: New Directions," CEPR Discussion Papers 9019, C.E.P.R. Discussion Papers.
    20. Gürtler, Oliver, 2006. "Optimal Ownership Structures in the Presence of Investment Signals," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 103, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.

    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

    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:eee:eecrev:v:87:y:2016:i:c:p:92-107. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: http://www.elsevier.com/locate/eer .

    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: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/eer .

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.