Power in a Theory of the Firm

Raghuram G. Rajan, Luigi Zingales

NBER Working Paper No. 6274
Issued in November 1997
NBER Program(s):   CF   IO   LE

Transactions take place in the firm rather than in the market because the firm offers agents" who make specific investments power. Past literature emphasizes the allocation of ownership as the" primary mechanism by which the firm does this. Within the contractibility assumptions of this" literature, we identify a potentially superior mechanism, the regulation of access to critical resources. " Access can be better than ownership because: i) the power agents get from access is more contingent" on them making the right investment; ii) ownership has adverse effects on the incentive to specialize. " The theory explains the importance of internal organization and third party ownership. "

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Document Object Identifier (DOI): 10.3386/w6274

Published: Quarterly Journal of Economics, Vol. 113, no. 2 (May 1998): 387-432. citation courtesy of

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