Power in a Theory of the Firm

Raghuram Rajan and Luigi Zingales

No 1777, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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: Incomplete Contracts; Theory of the Firm; Vertical Integration (search for similar items in EconPapers)
JEL-codes: D2 G3 L2 (search for similar items in EconPapers)
Date: 1998-01
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Citations: View citations in EconPapers (479)

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Related works:
Journal Article: Power in a Theory of the Firm (1998)
Working Paper: Power in a Theory of the Firm (1997)
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