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Edited by Enrico Colombatto
Chapter 17: The New Property Rights Theory of the Firm
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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