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- Publisher
- Oxford University Press
- Copyright
- Copyright © 2015 Oxford University Press
- ISSN
- 8756-6222
- eISSN
- 1465-7341
- DOI
- 10.1093/jleo/15.1.74
- Publisher site
- See Article on Publisher Site
Abstract
This article explores the economic role of the firm in a market economy. The analysis begins with a discussion and critique of the property rights approach to the theory of the firm as exposited in the recent work by Hart and Moore ('Property Rights and the Nature of the Firm'). It is argued that the Hart-Moore model, taken literally, can only explain why individuals own assets, but not why firms own assets. In particular, the logic of the model suggests that each asset should be free standing in order to provide maximal flexibility for the design of individual incentives. These implications run counter to fact. One of the key features of the modern firm is that it owns essentially all the productive assets that it employs. Employees rarely own any assets; they only contribute human capital. Why is the ownership of assets clustered in firms? This article outlines an answer based on the notion that control over physical assets gives control over contracting rights to those assets. Metaphorically, the firm is viewed as a miniature economy, an 'island' economy, in which asset ownership conveys the CEO the power to define the 'rules of the game', that is, the ability to restructure the incentives of those that accept to do business on (or with) the island. The desire to regulate trade in this fashion stems from contractual externalities characteristic of imperfect information environments. The inability to regulate all trade through a single firm stems from the value of exit rights as an incentive instrument and a tool to discipline the abuse of power. Oxford University Press « Previous | Next Article » Table of Contents This Article JLEO (1999) 15 (1): 74-102. doi: 10.1093/jleo/15.1.74 » Abstract Free Full Text (PDF) Free Classifications Article Services Article metrics Alert me when cited Alert me if corrected Find similar articles Similar articles in Web of Science Add to my archive Download citation Request Permissions Citing Articles Load citing article information Citing articles via CrossRef Citing articles via Scopus Citing articles via Web of Science Citing articles via Google Scholar Google Scholar Articles by Holmstrom, B. Search for related content Related Content Load related web page information Share Email this article CiteULike Delicious Facebook Google+ Mendeley Twitter What's this? 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Journal
The Journal of Law, Economics, and Organization – Oxford University Press
Published: Mar 1, 1999