This paper provides a framework for addressing the question of when transactions should be carried out within a firm and when through the market. Following Grossman and Hart, we identify a firm with the assets that its owners control. We argue that the crucial difference for party 1 between...

We consider an economy that has to decide how assets are to be used. Agents have ideas, but these ideas conflict. We suppose that decisionâ€making authority is determined by hierarchy: each asset has a chain of command, and the most senior person with an idea exercises authority. We analyze...