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Power in a Theory of the Firm

  • Raghuram G. Rajan
  • Luigi Zingales

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 National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6274.

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Date of creation: Nov 1997
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Publication status: published as Quarterly Journal of Economics, Vol. 113, no. 2 (May 1998): 387-432.
Handle: RePEc:nbr:nberwo:6274
Note: CF IO LE
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  1. Grossman, Sanford J & Hart, Oliver, 1985. "The Cost and Benefits of Ownership: A Theory of Vertical and Lateral Integration," CEPR Discussion Papers 70, C.E.P.R. Discussion Papers.
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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.
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