In the grossmanhartmoore model, expost negotiations always yield an efficient outcome. Grossmanhartmoore view ownership as residual control rights which matter only if contracts are incomplete. If there is asymmetric information, then ownership matters. Introduction the property rights theory of the firm of. The property rights theory of the firm of grossman, hart, and moore henceforth ghm grossman and hart, 1986. In this framework, parties use control rights over productive assets to ameliorate holdup problems created by incomplete contracts. Three essays on the property rights theory of the firm leshui he, ph. In their model, ownership matters when investments are partly. How to explain grossmanhartmoores theory for a dummy. Oliver hart massachusetts institute of technology john moore london school of economics this paper provides a framework for addressing the question of when transactions should be carried out within a firm and when through the market. Grossman model health as a consumption good duration.
Chiu 1998 and demeza and lockwood 1998 have extended the model by considering different bargaining games that the parties may play ex post which can explain ownership by the less important investor. The optimal way to organize this transaction depend on the. The empirical implications of the grossmanhart model. Not an expert but i can understand what wikipedia says. We study the case of completely relationshipspecific investments. Simons 1951 model of the employment relationship continues this tradition, as do williamsons 1975, 1985 work on fiat within firms, mastens 1988 legal basis for the firm, the propertyrights model of grossmanhartmoore, and the incentivesystem model of. We study the case of completely relationshipspecific investments i. Asymmetric information and the property rights approach to the. It is useful to illustrate the model with a realworld example. The second literature deals with the internal organization of the. The free rider problem in a classical paper, grossman and hart bell j. If each of the existing shareholders holds a small amount of shares then no takeover will ever take place. Our model is general enough, however, to allow for results in the spirit of the holmstrommilgrom incentivesystems is framework.
We model contractual incompleteness by assuming that some important future variables have to be left out of the contract if they are difficult or impossible to describe initially. Oliver williamson 2002 has criticized the grossmanhartmoore model because it is focused on ex ante investment incentives, while it neglects. Still, ownership and the residual right of control it confers matters because of the way it affects the outofequilibrium outside option and, through it, the share of ex post surplus each party appropriates. This paper extends the grossmanhartmoore model to suite a specific trilateral trade transaction. First, the formal models in grossman and hart 1986 and hart and moore 1990 take the view that ex post renego tiation of an incomplete contract occurs. Citeseerx ownership and control in outsourcing to china by.
Van reenen, forthcoming in the impact of incomplete contracts on economics, edited by philippe aghion, mathias dewatripont, patrick. This is a comment on incomplete contracts and the internal organization of firms by p. The grossmanhart analysis is restrictive in that it views the costs. In this paper we study a third factor which may be important in encouraging managers to pursue the profit motive. We also build simple contracting costs into the model, in the spirit of the holmstrommilgrom incentivesystems is framework. In the grossman hart moore model, expost negotiations always yield an efficient outcome. Indeed, this is what hart and moore explicitly assume in their 1990 property rights theory. The key question of their model is if contracts cannot fully specify the usage of the asset in every state of the world, then who gets the right to choose. A leading application of the incomplete contracting paradigm is the grossmanhartmoore property rights approach to the theory of the firm see hart, 1995.
We assume that effort costs cannot be reimbursed as part of a profitsharing scheme. Trilateral trade and asset allocation extending the. The grossmanhartmoore model has been successfully applied in many contexts, e. The theory of the firm consists of a number of economic theories that explain and predict the. This theory of the firm is now known as grossmanhartmoore ghm. In this transaction a downstream producer produces the final good using inputs from two different. One could go as far as to say that the property rights model in the grossmanhart paper is about the distribution of assets among individuals the entrepreneurs rather than firms. Grossman and i constructed a formal model along these lines see grossman and hart 1986, and i developed the ideas and model further in work with john moore see hart and moore 1990. Residual control rights matter only if contracts are incomplete. The incomplete contracting paradigm was pioneered by sanford j. Vertical integration and market foreclosure by oliver hart.
Hart and moore 1990 consider broader implications by asking what ownership does to employees incentives. The essence of the grossmanhart model especially as extended in the hartmoore model of 1990 concerns the optimal distribution of that holdup power. Are there grossmanhartmoore models without efficient. Indispensable in grossmanhartmoore model expert answer a ssnip ssnip test seeks to identify smallest market within which a hypothetical monopolist could impose a. The grossmanhartmoore calculus assumes that investment and output are observable, but not verifiable. Theory of the firm wharton finance university of pennsylvania. Join facebook to connect with barbara grossman hart and others you may know. In the empirical analysis, we find that multinational firms engaged in export processing in china tend to split factory ownership and input control with factory managers in china. Ownership matters for investment incentives, provided that investments are partly relationshipspecific. In the grossmanhartmooreproperty rights approach to the theory of the firm, it is usually assumed that information is symmetric.
Grossmanhartmoore assume costless renegotiation ex post. Moreover, recall that aghion and tiroles 1994a model builds on the property rights approach that was developed by grossman and hart 1986 and hart and moore 1990. Control over physical assets can lead indirectly to control over hu. In this transaction a downstream producer produces the final good using inputs from two different upstream suppliers. A of hart and moore 1988, we give a brief noncooperative justification for the use of. Hart and moore were the first to model the shift of control triggered by.
In the grossmanhartmoore theory, it is assumed that information is symmetric. Following grossman and hart, we identify a firm with the assets that its owners control. The basic result in grossman and hart was that there is no equilibrium where the takeover succeeds at a price below l 5. In modern contract theory, the theory of the firm is often identified with the property rights approach that was developed by sanford j. Sanford grossman, oliver hart, and john moore have developed a theory of the firm based on incomplete contracting hart was awarded the nobel prize in 2016 for this branch of the literature. Chapter 1 incomplete contracts new york university. Incomplete contracts and the theory of the firm the. The relevance of incompletecontracting theories of integration is not particularly dif. The relevance of incompletecontracting theories of integration is not. The former avoids some stochastic elements, making the model more tractable and distinguishing it from agency theory. We argue that the crucial difference for party 1 between owning a firm integration and contracting for a service from another party 2 who owns this firm. The grossmanhartmoore framework has recently been used in international trade literature by grossman and helpman 2002b, 2002c, 2003 and antras 2003, 2004. Given the relevance of the grossmanhartmoore approach in many fields of economics, 5 surprisingly few attempts have been made to test their theory in the laboratory.
Grossmanhart 1986 and hartmoore 1988 have developed a theory of vertical integration and ownership based on this form of contractual incompleteness. Hart and moore 1990 extend the grossmanhart model into a multiple agent, multipleasset setting where the ownership of physical capital can be extended to a control over human capital. Grossman and hart reconceptualized the math into a convex programming problem. Grossman and hart 1986 consider a more general model in which both. Grossman, hart and moore assume that the only contracts that can be written. Global production networks necessarily entail contracting relationships between agents located. Incomplete contracts and control harvard university. Introductory remarks on grossman and hart 1986 oxford.
Hart, 1995 has made significant progress in our understanding of firm ownership. This paper enriches the celebrated grossmanhartmoore ghm property rights model with employment relationships. In their seminal contributions, grossman and hart 1986, hart and moore 1990, and hart 1995 argue that in practice, contracts cannot specify what is to be done in every possible contingency. General model of asset ownership not only vertical integration. Asymmetric information and the property rights approach to. Contracts and the division of labor national bureau of. When comprehensive contracts possible, optimal use of asset can be speci. An incomplete contracts theory of information, technology. Hartt although both salary incentive schemes and takeover bids can reduce the seriousness of the incentive problem, they will not in general eliminate it completely. Grossman and helpman 2002a, 2002b and antras 2001 use grossmanhartmoore to develop generalequilibrium models of global outsourcing and intrafirm trade.
Because it would be impossibly complex and costly for the parties to an agreement to make their contract complete, 16 the law provides default rules which fill in the gaps in the actual. Theorists love the paper, and it was highly influential when it came out. It then summarizes in a model the spirit of the ghm paradigm, illuminating the role of asset ownership and the fact that no one ownership structure is best but brings both costs and benefits. The property rights approach to the theory of the firm is also known as the grossman hart moore theory. Moreover one of the upstream supplier needs an input from the other upstream supplier for its production. Ownership control qje uc san diego school of global. They argue that if contracts cannot specify what is to be done given every possible contingency, then property rights and hence firm boundaries matter. None of these studies investigates the effects of contracting institutions on technology choice. One could go as far as to say that the property rights model in the grossmanhart. Property rights and the nature of the firm journal of. A theory of vertical and lateral integration the harvard community has made this article openly available. Here is hart and moore on incomplete contracts and renegotiation.
Grossman and helpman 2002c apply holmstrommilgrom to model managerial compensation in global production. In their model, ownership matters when investments are partly relationshipspecific. University of connecticut, 20 abstract my dissertation research focuses on the e. Three essays on the property rights theory of the firm. In this transaction a downstream producer produces the nal good using inputs from two di. This paper provides a framework for addressing the question of when transactions should be carried out within a firm and when through the market. Collectively these papers are often referred to as property rights theory prt. Trilateral trade and asset allocation extending the grossmanhartmoore model eric rehn december 20, 2007 abstract this paper extends the grossmanhartmoore model to suite a specic trilateral trade transaction. In the grossmanhartmoore framework, we show that the gains to giving one party factory ownership tend to be greater when that party lacks control over inputs.