Contracts versus Assets and the Boundary of the Firm
34 Pages Posted: 25 Jan 2012
Date Written: January 5, 2012
Both asset ownership and contracts play important roles in providing incentives for relationship specific investments, and hence in determining the boundary of the firm. Significant progress has been made in understanding the roles that these instruments play, but largely in isolation from each other. We provide a framework for understanding when assets or contracts are, practically, the optimal instrument to use. We distinguish between one- and two-sided investments, and cooperative and selfish investments. We also offer some new insights on how contracts may be made renegotiation-proof.
Keywords: Incomplete contracts, firms mechanisms
JEL Classification: D20
Suggested Citation: Suggested Citation