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Power in a Theory of the Firm

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  • Rajan, Raghuram G
  • Zingales, Luigi

Abstract

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.

Suggested Citation

  • Rajan, Raghuram G & Zingales, Luigi, 1998. "Power in a Theory of the Firm," CEPR Discussion Papers 1777, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:1777
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    More about this item

    Keywords

    Incomplete Contracts; Theory of the Firm; Vertical Integration;
    All these keywords.

    JEL classification:

    • D2 - Microeconomics - - Production and Organizations
    • G3 - Financial Economics - - Corporate Finance and Governance
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior

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