IDEAS home Printed from https://ideas.repec.org/a/ucp/jpolec/v94y1986i4p691-719.html
   My bibliography  Save this article

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

Author

Listed:
  • Grossman, Sanford J
  • Hart, Oliver D

Abstract

Our theory of costly contracts emphasizes that contractual rights can be of two types: specific rights and residual rights. When it is 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. When residual rights are purchased by one party, they are lost by a second party, and this inevitably creates distortions. Firm 1 purchases firm 2 when firm 1's control increases the productivity of its management more than the loss of control decreases the productivity of firm 2's management.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • 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.
  • Handle: RePEc:ucp:jpolec:v:94:y:1986:i:4:p:691-719
    DOI: 10.1086/261404
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1086/261404
    File Function: full text
    Download Restriction: Access to full text is restricted to subscribers. See http://www.journals.uchicago.edu/JPE for details.

    File URL: https://libkey.io/10.1086/261404?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. Rubinstein, Ariel, 1982. "Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, vol. 50(1), pages 97-109, January.
    2. Klein, Benjamin, 1980. "Transaction Cost Determinants of "Unfair" Contractual Arrangements," American Economic Review, American Economic Association, vol. 70(2), pages 356-362, May.
    3. Michael Waldman, 1984. "Worker Allocation, Hierarchies and the Wage Distribution," Review of Economic Studies, Oxford University Press, vol. 51(1), pages 95-109.
    4. Sherwin Rosen, 1982. "Authority, Control, and the Distribution of Earnings," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 311-323, 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 519-540, September.
    7. 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.
    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. De Fraja, Gianni, 2004. "Hierarchies in organisations and labour market competition," Labour Economics, Elsevier, vol. 11(6), pages 669-686, December.
    2. Dato, Simon & Grunewald, Andreas & Kräkel, Matthias & Müller, Daniel, 2016. "Asymmetric employer information, promotions, and the wage policy of firms," Games and Economic Behavior, Elsevier, vol. 100(C), pages 273-300.
    3. Andre Lorentz & Tommaso Ciarli & Maria Savona & Marco Valente, 2019. "Structural Transformations and Cumulative Causation: Towards an Evolutionary Micro-foundation of the Kaldorian Growth Model," Working Papers of BETA 2019-15, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    4. C. Sofia Machado & Miguel Portela, 2011. "Age and opportunities for promotion," NIPE Working Papers 03/2011, NIPE - Universidade do Minho.
    5. Ekinci, Emre, 2019. "Discretionary bonuses and turnover," Labour Economics, Elsevier, vol. 60(C), pages 30-49.
    6. Valerie Smeets & Michael Waldman & Frederic Warzynski, 2019. "Performance, Career Dynamics, and Span of Control," Journal of Labor Economics, University of Chicago Press, vol. 37(4), pages 1183-1213.
    7. repec:eee:labchp:v:3:y:1999:i:pb:p:2373-2437 is not listed on IDEAS
    8. Robert Gibbons, 1996. "Incentives and Careers in Organizations," NBER Working Papers 5705, National Bureau of Economic Research, Inc.
    9. Freeman, Scott, 1996. "Equilibrium Income Inequality among Identical Agents," Journal of Political Economy, University of Chicago Press, vol. 104(5), pages 1047-1064, October.
    10. Lucas, David S. & Fuller, Caleb S. & Piano, Ennio E., 2018. "Rooking the state," International Review of Law and Economics, Elsevier, vol. 55(C), pages 12-20.
    11. Wheeler, Christopher H., 2008. "Worker turnover, industry localization, and producer size," Journal of Economic Behavior & Organization, Elsevier, vol. 66(2), pages 322-334, May.
    12. Tobias Hiller, 2021. "Hierarchy and the size of a firm," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 68(3), pages 389-404, September.
    13. Affuso, L., 2000. "Intra-Firm Retail Contracting: Survey Evidence from the UK'," Cambridge Working Papers in Economics 0022, Faculty of Economics, University of Cambridge.
    14. Reuer, Jeffrey J. & Ariño, Africa, 2002. "Contractual heterogeneity in strategic alliances," IESE Research Papers D/482, IESE Business School.
    15. Alexander K. Koch & Eloïc Peyrache, 2011. "Aligning Ambition and Incentives," Journal of Law, Economics, and Organization, Oxford University Press, vol. 27(3), pages 655-688.
    16. Vanesa Solís-Rodríguez & Manuel González-Díaz, 2017. "Differences in contract design between successful and less successful franchises," European Journal of Law and Economics, Springer, vol. 44(3), pages 483-502, December.
    17. Sexton, Richard J., 1991. "Game Theory: A Review With Applications To Vertical Control In Agricultural Markets," Working Papers 225865, University of California, Davis, Department of Agricultural and Resource Economics.
    18. Smirnov, Vladimir & Wait, Andrew, 2004. "Timing of investments, holdup and total welfare," International Journal of Industrial Organization, Elsevier, vol. 22(3), pages 413-425, March.
    19. Barro, Jason R & Barro, Robert J, 1990. "Pay, Performance, and Turnover of Bank CEOs," Journal of Labor Economics, University of Chicago Press, vol. 8(4), pages 448-481, October.
    20. van den Brink, J.R. & Ruys, P.H.M., 2005. "Technological Change, Wages and Firm Size," Other publications TiSEM 98a153c9-4986-4d03-b695-c, Tilburg University, School of Economics and Management.
    21. Kevin J. Murphy & Jan Zabojnik, 2006. "Managerial Capital And The Market For Ceos," Working Paper 1110, Economics Department, Queen's University.

    More about this item

    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:ucp:jpolec:v:94:y:1986:i:4:p:691-719. 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: https://www.journals.uchicago.edu/JPE .

    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: Journals Division (email available below). General contact details of provider: https://www.journals.uchicago.edu/JPE .

    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.