Markets for Ownership

Abstract:     
The prevailing economic theory of the firm, based on a property rights perspective, has demonstrated that ownership by dispensable, outside parties is an inefficient outcome relative to ownership by productive agents. In order to better understand observed patterns of ownership, this paper considers the outcome of markets for ownership that operate prior to production taking place. The main result is that outside parties will often become the equilibrium asset owners. This is precisely because, but for ownership, such parties would not earn rents. In contrast, productive agents earn rents even when they do not own assets. Given that their contribution is complementary with other productive agents, their willingness-to-pay for ownership is less than that of an outside party. This result is robust to the introduction of moderate levels of inefficiency arising from outside ownership and to a consideration of opportunities for re-sale before production begins. The main conclusion drawn is that the nature of the operation of markets for ownership stands alongside incentive effects as important predictors of firm boundaries.

Number of Pages in PDF File: 42

Keywords: ownership, property rights, outside parties, firm boundaries, Coase, incomplete contracts, equilibrium, resale

JEL Classification: D23, L22

working papers series