This paper attempts to formalize the transaction cost theory of the firm. Building on the formal approach of Grossman and Hart (1986), a model is developed to capture the essential elements of the transaction cost theory, particularly those that are distinct from the formal property rights...

In the Grossman-Hart-Moore property rights approach to the theory of the firm, it is usually assumed that information is symmetric. Ownership matters for investment incentives, provided that investments are partly relationship-specific. We study the case of completely relationship-specific...

Consider a partnership consisting of two symmetrically informed parties who may each own a share of an asset. It is ex post efficient that tomorrow the party with the larger valuation gets the asset. Yet, today the parties can make investments to enhance the asset's productivity. Contracts are...

Two parties can at some future date 2 negotiate about whether or not to collaborate in order to generate a surplus. Yet, the negotiation stage will be reached only if at date 1 both parties pay their respective transaction costs. We show that the expected total surplus may be larger when at date...

Buyers may try to motivate their sellers to make relationship-specific investments to reduce the probability that the design of the goods they procure is defective. In some countries, courts examine how much real authority the seller had in performing the work to assign liability for a design...

Consider a buyer and a seller who have agreed to trade an intermediate good. It is ex-post efficient to adapt the good to the prevailing state of the world. The seller has private information about the costs of adapting the good. In the case of non-integration, the buyer has no possibility to...

While focusing on residual control rights, the property rights theory of the firm overlooks that the legal protection of each party's input shapes its ex post bargaining power. By assuming that the property rights on the inputs are selected by a---possibly---benevolent legislator to maximize...

The analysis of adverse selection problems in seller-buyer relationships has typically been based on the assumption that private information is uncertifiable, while in practice it may well be certifiable. If a buyer has certifiable private information, he can conceal evidence, but he cannot...

This paper analyses procurement from two, risk-averse, suppliers who are responsible for the timely delivery of some inputs. Their production is subject to inherent disruptions. We characterize the optimal contracts when suppliers can invest to lower the risk of delays that are costly to the...

The application of Nash bargaining solution to profit division in negotiation between opencast lignite mine and power plant has been discussed. Different proposals of status quo point usage and ways of its determination for profit sharing both in strategic and tactical/operational negotiation...