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Power in a Theory of the Firm

  • Rajan, Raghuram G
  • Zingales, Luigi

Transactions take place in the firm rather than in the market because the firm offers agents who make specific investments power. Past literature emphasizes the allocation of ownership as the primary mechanism by which the firm does this. Within the contractibility assumptions of this literature, we identify a potentially superior mechanism, the regulation of access to critical resources. Access can be better than ownership because: i) the power agents get from access is more contingent on them making the right investment; ii) ownership has adverse effects on the incentive to specialize. The theory explains the importance of internal organization and third-party ownership.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1777.

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Date of creation: Jan 1998
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Handle: RePEc:cpr:ceprdp:1777
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  1. Oliver Hart & Sanford Grossman, 1985. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Working papers 372, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Bengt Holmstrom, 1981. "Moral Hazard in Teams," Discussion Papers 471, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  3. Hart, Oliver D. & Moore, John, 1990. "Property Rights and the Nature of the Firm," Scholarly Articles 3448675, Harvard University Department of Economics.
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  7. Hansmann, Henry, 1988. "Ownership of the Firm," Journal of Law, Economics and Organization, Oxford University Press, vol. 4(2), pages 267-304, Fall.
  8. Stole, Lars A & Zwiebel, Jeffrey, 1996. "Organizational Design and Technology Choice under Intrafirm Bargaining," American Economic Review, American Economic Association, vol. 86(1), pages 195-222, March.
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  13. 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, MIT Press, vol. 113(2), pages 361-386, May.
  14. Stole, Lars A & Zwiebel, Jeffrey, 1996. "Intra-firm Bargaining under Non-binding Contracts," Review of Economic Studies, Wiley Blackwell, vol. 63(3), pages 375-410, July.
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