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Garrouste, Pierre --- "The New Property Rights Theory of the Firm" [2004] ELECD 114; in Colombatto, Enrico (ed), "The Elgar Companion to the Economics of Property Rights" (Edward Elgar Publishing, 2004)

Book Title: The Elgar Companion to the Economics of Property Rights

Editor(s): Colombatto, Enrico

Publisher: Edward Elgar Publishing

ISBN (hard cover): 9781840649949

Section: Chapter 17

Section Title: The New Property Rights Theory of the Firm

Author(s): Garrouste, Pierre

Number of pages: 13

Extract:

17 The new property rights theory of the firm
Pierre Garrouste*


Introduction
The idea that the firm can be conceived on the basis of the definition and
distribution of property rights has generated an important literature. Coase
(1960) is one of the first who emphasized the idea that property rights are
effective in economics. Alchian (1965) and Demsetz (1967) clarify the
notion of property rights and extend its application in economics. Grossman
and Hart (1986) define the firm with an explicit reference to the distribution
of ownership of the assets, while Hart and Moore (1990) give a perfect
formal presentation of a property rights-based theory of the firm (with only
two parties and without looking at the internal organization of the firm, see
below). They `identify the firm with the assets it possesses and take the
position that ownership confers residual rights of control over the firm's
assets: the right to decide how these assets are to be used except to the
extent that particular usages have been specified in an initial contract'
(ibid., p. 1120).1
The main problem that the new property rights theory of the firm à la
Grossman and Hart (1986) tries to solve, concerns the effect that ownership
of assets has on the incentives of two parties (usually a buyer and a seller) to
invest ex ante in non-contractible assets,2 knowing that they share ex post the
quasi-rents that their investments produce. The two parties have the possi-
bility of trading ...