The Property Rights Theory of Vertical Relations: Evidence from the Hollywood Studio Era
Abstract: Empirical tests of the Grossman, Hart, and Moore property rights theory (PRT) generally link measures intended to capture the relative importance of non-contractible investment to predicted differences in ownership regimes. By contrast, in this paper we explore how an exogenous change in ownership regime affects a proxy for non-contractible investment, exploiting a unique dataset. As a result, we can test PRT from a different tack than that taken by earlier studies. During the famous Hollywood studio era of the 1930s and 1940s, actors worked for movie production companies under de facto lifetime contracts, receiving fixed salaries in return for granting studios control rights and residual claims associated with subsequent films made. Two exogenous shocks (in the form of court decisions) shifted those rights and claims to actors. We develop a model to analyze the impact of that change on investment in talent discovery. We find that actors under studio contract were cast in substantially more film roles (our proxy measure of non-contractible investment in talent discovery), ceteris paribus, as our model predicts. We find some evidence that actor own-investment was weaker during the studio era. We also discuss how contracts changed, and how talent agencies (representing actors) attempted to reconstitute the studio system in the 1950s and 1960s, until stopped by antitrust authorities. This paper’s results thus demonstrate the importance of residual rights to non-contractible investment, as PRT predicts.
