Tuesday, January 15, 2008

Combining TCE and PRT

A recent paper by Patrick Schmitz, “Information Gathering, Transaction Costs, and the Property Rights Approach” (AER, March 2006) tries to reconcile two perspectives in the theory of nature and the boundary of the firm, namely Transaction Cost Economics (TCE, a la Coase, Williamson, Klein, Crawford and Alchain) and Property Rights Theory (a la Hart, Grossman and Moore) by creating a GHM-style incomplete-contracting model in which parties can obtain private information about their ex post benefit, resulting in inefficient rent-seeking over the realized gains from trade. Under certain circumstances, the PRT conclusions are reversed — i.e., the party with the most important relationship-specific investment should not necessarily own the other party’s asset, as the PRT implies. Worth a read.

Hat tip to Organizations and Markets.

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