Information Gathering, Transaction Costs and the Property Rights Approach
30 Pages Posted: 27 Mar 2006
Date Written: December 2005
The property rights approach to the theory of the firm suggests that ownership structures are chosen in order to provide ex ante investment incentives, while bargaining is ex post efficient. In contrast, transaction cost economics emphasizes ex post inefficiencies. In the present paper, a party may invest and acquire private information about the default payoff that it can realize on its own. Inefficient rent-seeking can overturn prominent implications of the property rights theory. In particular, ownership by party B may be optimal, even though only the indispensable party A makes an investment decision.
Keywords: Theory of the firm, incomplete contracts, ownership rights
JEL Classification: D23, L14, L22
Suggested Citation: Suggested Citation