The Elgar Companion to the Economics of Property Rights
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The Elgar Companion to the Economics of Property Rights

Edited by Enrico Colombatto

Economics is a matter of choice and growth, of interaction and exchange among individuals. Because property rights define the rules of these interactions and the objects of exchange, it is vital to fully understand the institutions and implications of the various property-rights regimes. With over 20 original and specially commissioned chapters, this book takes the reader from the historical and moral foundations of the discipline to the frontiers of scholarly research in the field.
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Chapter 17: The New Property Rights Theory of the Firm

Pierre Garrouste


17 The new property rights theory of the firm Pierre Garrouste* Introduction The idea that the firm can be conceived on the basis of the definition and distribution of property rights has generated an important literature. Coase (1960) is one of the first who emphasized the idea that property rights are effective in economics. Alchian (1965) and Demsetz (1967) clarify the notion of property rights and extend its application in economics. Grossman and Hart (1986) define the firm with an explicit reference to the distribution of ownership of the assets, while Hart and Moore (1990) give a perfect formal presentation of a property rights-based theory of the firm (with only two parties and without looking at the internal organization of the firm, see below). They ‘identify the firm with the assets it possesses and take the position that ownership confers residual rights of control over the firm’s assets: the right to decide how these assets are to be used except to the extent that particular usages have been specified in an initial contract’ (ibid., p. 1120).1 The main problem that the new property rights theory of the firm à la Grossman and Hart (1986) tries to solve, concerns the effect that ownership of assets has on the incentives of two parties (usually a buyer and a seller) to invest ex ante in non-contractible assets,2 knowing that they share ex post the quasi-rents that their investments produce. The two parties have the possibility of trading outside, that...

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