The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration | Zendy

Sanford J. Grossman | Zendy; Oliver Hart | Zendy

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The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration

Author(s) -

Sanford J. Grossman,

Oliver Hart

Publication year - 1986

Publication title -

journal of political economy

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 21.034

H-Index - 186

eISSN - 1537-534X

pISSN - 0022-3808

DOI - 10.1086/261404

Subject(s) - residual , productivity , property rights , business , theory of the firm , control (management) , industrial organization , microeconomics , law and economics , economics , management , algorithm , computer science , macroeconomics

Our theory of costly contracts emphasizes that contractual rights can be of two types: specific rights and residual rights. When it is costly to list all specific rights over assets in the contract, it may be optimal to let one party purchase all residual rights. Ownership is the purchase of these residual rights. When residual rights are purchased by one party, they are lost by a second party, and this inevitably creates distortions. Firm 1 purchases firm 2 when firm 1's control increases the productivity of its management more than the loss of control decreases the productivity of firm 2's management.

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