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Discussion Paper Details

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Title: Power in a Theory of the Firm

Author(s): Raghuram G Rajan and Luigi Zingales

Publication Date: January 1998

Keyword(s): Incomplete Contracts, Theory of the Firm and Vertical Integration

Programme Area(s): Financial Economics and Industrial Organization

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.

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Bibliographic Reference

Rajan, R and Zingales, L. 1998. 'Power in a Theory of the Firm'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=1777