Transaction Costs and the Property Rights Approach to the Theory of the Firm

33 Pages Posted: 21 Oct 2014

See all articles by Daniel Müller

Daniel Müller

University of Bonn; Queensland University of Technology

Patrick W. Schmitz

University of Cologne; Centre for Economic Policy Research (CEPR)

Date Written: October 2014

Abstract

The standard property rights approach is focused on ex ante investment incentives, while there are no transaction costs that might restrain ex post negotiations. We explore the implications of such transaction costs. Prominent conclusions of the property rights theory may be overturned: A party may have stronger investment incentives when a non-investing party is the owner, and joint ownership can be the uniquely optimal ownership structure. Intuitively, an ownership structure that is unattractive in the standard model may now be desirable, because it implies large gains from trade, such that the parties are more inclined to incur the transaction costs.

Keywords: incomplete contracts, joint ownership, property rights approach, transaction costs, vertical integration

JEL Classification: D23, D86, L24

Suggested Citation

Müller, Daniel and Schmitz, Patrick W., Transaction Costs and the Property Rights Approach to the Theory of the Firm (October 2014). CEPR Discussion Paper No. DP10207. Available at SSRN: https://ssrn.com/abstract=2512735

Daniel Müller (Contact Author)

University of Bonn ( email )

Regina-Pacis-Weg 3
Postfach 2220
Bonn, D-53012
Germany

Queensland University of Technology ( email )

2 George Street
Brisbane, Queensland 4000
Australia

Patrick W. Schmitz

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

HOME PAGE: http://schmitz.uni-koeln.de/index.php?s=mitarbeiter&t=schmitz

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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