The Elgar Companion to Transaction Cost Economics
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The Elgar Companion to Transaction Cost Economics

Edited by Peter G. Klein and Michael E. Sykuta

Since its emergence in the 1970s, transaction cost economics (TCE) has become a leading approach in the research on contracts, firm organization and strategy, antitrust, marketing, inter-firm collaboration and entrepreneurship. With contributions by leading scholars in economics, law and business administration – including Oliver E. Williamson, recipient of the 2009 Nobel Prize in economics for his development of the transaction cost approach – this volume reviews the latest developments in TCE and applies them to contemporary theoretical and empirical problems.
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Chapter 10: Property Rights Economics

Nicolai J. Foss


Nicolai J. Foss The 1960s were extraordinarily fertile in applied as well as formal microeconomics. Thus the decade witnessed fundamental breakthroughs in the economics of uncertainty and information and in human capital theory, the first stabs at what would later be called ‘agency theory’ and ‘mechanism design’, and other advances in mathematical economics. One of the important breakthrough theories of the 1960s was property rights economics (PRE). ‘First-generation’ property-rights economists such as Armen Alchian, Ronald Coase, Harold Demsetz, and (Coase student) Steven Cheung developed a refined but mainly verbal approach to an economic explanation that they saw, and advertised, as fundamentally neoclassical but with a much wider explanatory reach. Their work served as direct inspiration for the slightly later work of the ‘secondgeneration’ PRE theorists such as Louis De Alessi, Yoram Barzel, Eirik Furubotn, Douglass North, Steven Pejovich, and John Umbeck. Modern (third-generation) representatives of the PRE are Douglas Allen, Lee Alston, Thrainn Eggertson, Gary Libecap, Dean Lueck, Ellinor Ostrom, and others. A different approach, emerging in the mid 1980s (Grossman and Hart, 1986), growing out of formal contract theory as well as key ideas in transaction cost economics (TCE), and associated with the work of Oliver Hart and his colleagues and students, is often also referred to as the ‘property-rights approach’. This approach will be briefly discussed towards the end of the chapter. PRE has been directly and strongly influential in law and economics (Coase, 1960), economic history (Alchian and Demsetz, 1973; North, 1990), the theory of the firm...

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