Beyond Asset Ownership: Employment and Asset-less Firms in a Property-rights Theory of the Firm
Abstract: Although most firms own alienable assets, many firms do not. This paper approaches the problem by embedding the Grossman-Hart-Moore (GHM) property rights model within a larger theoretical framework that can describe a richer spectrum of governance structures—including not only fully integrated firms and fully disintegrated market transactions, but also asset-less firms and exclusive dealing between firms. The framework operates by combining the GHM model with a model of bargaining control rights, yield- ing, in some cases, an allocation of ownership rights different from what the GHM model implies. When we interpret the model at the level of individuals, it can be efficient to prohibit employees from side-contracting with each other, and preventing other firms from side-contracting with one firm’s employee could also improve efficiency. These results are consistent with what we observe in employment law. An important benefit of this approach is a clear interpretation of the employment relationship, i.e., an affiliation between the firm and its employees when there are multiple parties in the model. When we interpret the players at the business unit level, the model shows that dealing with a firm through an exclusive dealing contract could be more efficient than both dealing with a fully independent firm and producing through a fully integrated business unit, such as a division or subsidiary.
