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Global ProductionFirms, Contracts, and Trade Structure$
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Pol Antràs

Print publication date: 2015

Print ISBN-13: 9780691168272

Published to Princeton Scholarship Online: October 2017

DOI: 10.23943/princeton/9780691168272.001.0001

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The Property-Rights Approach

The Property-Rights Approach

Chapter:
(p.192) 7 The Property-Rights Approach
Source:
Global Production
Author(s):

Pol Antràs

Publisher:
Princeton University Press
DOI:10.23943/princeton/9780691168272.003.0007

This chapter turns to the property-rights theory of the firm, which arguably constitutes the most compelling and influential theory of the firm explaining in a unified framework both the benefits as well as the costs of vertical integration. The central idea of the property-rights approach is that internalization matters because ownership of non-human assets is a source of power when contracts are incomplete. More specifically, when parties encounter contingencies that were not foreseen in an initial contract, the owner of these assets naturally holds residual rights of control, and they can decide on the use of these assets that maximizes payoff at the possible expense of that of the integrated party.

Keywords:   property-rights theory, property-rights approach, vertical integration, internalization, contractual incompleteness

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