DP10207 Transaction costs and the property rights approach to the theory of the firm

Author(s): Daniel Muller, Patrick W. Schmitz
Publication Date: October 2014
Keyword(s): incomplete contracts, joint ownership, property rights approach, transaction costs, vertical integration
JEL(s): D23, D86, L24
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=10207

The standard property rights approach is focused on ex ante investment incentives, while there are no transaction costs that might restrain ex post negotiations. We explore the implications of such transaction costs. Prominent conclusions of the property rights theory may be overturned: A party may have stronger investment incentives when a non-investing party is the owner, and joint ownership can be the uniquely optimal ownership structure. Intuitively, an ownership structure that is unattractive in the standard model may now be desirable, because it implies large gains from trade, such that the parties are more inclined to incur the transaction costs.