DP1777 Power in a Theory of the Firm
|Author(s):||Raghuram G Rajan, Luigi Zingales|
|Publication Date:||January 1998|
|Keyword(s):||Incomplete Contracts, Theory of the Firm, Vertical Integration|
|JEL(s):||D2, G3, L2|
|Programme Areas:||Financial Economics, Industrial Organization|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=1777|
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.