Working Paper: CEPR ID: DP1777
Authors: Raghuram G. Rajan; Luigi Zingales
Abstract: 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.
Keywords: theory of the firm; vertical integration; incomplete contracts
JEL Codes: 02; G3; L2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| access to critical resources (Q34) | specific investments (G11) |
| ownership (H13) | investment incentives (O31) |
| ownership (H13) | specialization incentives (F12) |
| access (Y60) | incentives to specialize (F12) |