The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration

1986/08/01 by Sanford J. Grossman, Oliver Hart · 8 citations
Economics, Econometrics and Finance · Decision Sciences · #Economic theories and models #Auction Theory and Applications #Law, Economics, and Judicial Systems #Residual #Productivity #Property rights #Business #Theory of the firm #Control (management) #Industrial organization #Microeconomics #Law and economics #Economics

paper · doi:10.1086/261404

openalex publication_date 1986/08/01 · openalex created_date 2025/10/10 · openalex updated_date 2026/08/05

Abstract

Our theory of costly contracts emphasizes the contractual rights can by of two types: specific rights and residual rights. When it is costly to list all specific rights over assets in the contract, it may be optimal to let one party purchase all residual rights. Ownership is the purchase of these residual rights. When residual rights are purchased by one party, they are lost by a second party, and this inevitably creates distortions. Firm 1 purchases firm 2 when firm 1's control increases the productivity of its management more than the loss of control decreases the productivity of firm 2's management.

Citations

• The Nature of the Firm
• Incomplete Contracts and Renegotiation
• Vertical Integration, Appropriable Rents, and the Competitive Contracting Process

Cited by

• Information Gathering, Transaction Costs, and the Property Rights Approach
• Chapter 4 Vertical integration: Determinants and effects
• Does Asset Ownership Always Motivate Managers? Outside Options and the Property Rights Theory of the Firm
• Incomplete Contracts: Where do We Stand?
• Playing the collaboration game right—balancing trust and contracting
• The Contract and the Market: Towards a Broader Notion of Transaction?
• Misconceptions of power: From Alchian and Demsetz to Bowles and Gintis
• Vertical integration [wikipedia]