Topic 1：Property Right Approach
Topic 1：Property Right Approach
After skimming through the abstract and conclusion points of the listed material for the first topic The Property Rights Approach, I chose the famous book Firms, Contracts, and Financial Structure for further study. This book provides a framework for thinking about economic relationships and institutions such as firms. The basic argument is that in a world of incomplete contracts, institutional arrangements are designed to allocate power among agents. It points out that traditional approaches such as the neoclassical, principal‐agent, and transaction costs theories cannot by themselves explain firm boundaries. And describes a theory—the incomplete contracting or property rights approach—based on the idea that power and control matter when contracts are incomplete.
As far as I see, neoclassical theory, views the firm mainly in technological terms. A single-product firm is represented by a production function and is trying to maximize profit under the constraint of technology and market. But it ignores all incentive problems and the internal organization within the firm. Principal-agent theory introduces the incentive schemes but it misses the important factor that writing a good contract is costly. Transaction Cost Theories points out contracts are not comprehensive and are revised and renegotiated all the time and relationship-specific investment results in high ex ante costs, that is, a prior investment which creates value if the parties’ economic relationship extends over time, but does not if the parties split up. However, the theory could not provide the answer why there is less haggling and hold-up behavior in a merged firm.
All the theories above do not explain what changes when two firms merge. And the author therefore tried to address this question with the property rights approach. Provided with a simple model of two assets a1 and a2 and two managers operating them, M1 and M2 that illustrates the benefits and costs
After skimming through the abstract and conclusion points of the listed material for the first topic The Property Rights Approach, I chose the famous book Firms, Contracts, and Financial Structure for further study. This book provides a framework for thinking about economic relationships and institutions such as firms. The basic argument is that in a world of incomplete contracts, institutional arrangements are designed to allocate power among agents. It points out that traditional approaches such as the neoclassical, principal‐agent, and transaction costs theories cannot by themselves explain firm boundaries. And describes a theory—the incomplete contracting or property rights approach—based on the idea that power and control matter when contracts are incomplete.
As far as I see, neoclassical theory, views the firm mainly in technological terms. A single-product firm is represented by a production function and is trying to maximize profit under the constraint of technology and market. But it ignores all incentive problems and the internal organization within the firm. Principal-agent theory introduces the incentive schemes but it misses the important factor that writing a good contract is costly. Transaction Cost Theories points out contracts are not comprehensive and are revised and renegotiated all the time and relationship-specific investment results in high ex ante costs, that is, a prior investment which creates value if the parties’ economic relationship extends over time, but does not if the parties split up. However, the theory could not provide the answer why there is less haggling and hold-up behavior in a merged firm.
All the theories above do not explain what changes when two firms merge. And the author therefore tried to address this question with the property rights approach. Provided with a simple model of two assets a1 and a2 and two managers operating them, M1 and M2 that illustrates the benefits and costs