The Cost and Benefits of Ownership: A Theory of Vertical and Lateral Integration

Sanford Jay Grossman and Oliver D. Hart

No 70, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: What determines how integrated a firm is? We emphasize the benefits of "control" when there are difficulties in writing complete contracts. We define the firm as being composed of its assets. We present a theory of costly contracts which emphasizes that contractual rights can be of two types: specific rights and residual rights. When it is too costly to list all specific rights over assets in the contract, it may be optimal to let one party purchase all residual rights. Ownership is the purchase of these residual rights. We show that there can be costs associated with the wrong allocation of residual rights.

Keywords: Contracts; Horizontal Integration; Theory of the Firm; Vertical Integration (search for similar items in EconPapers)
Date: 1985-07
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Related works:
Working Paper: The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration (1985)
Journal Article: The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration (1986)
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