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Property rights and the nature of the firm journal of political economy
628
Article
reviews
this mechanism, the facility and its operations are held in a separate management company with multiple co-owners who compete to supply services using the common facility’. This arrangement can be easily extended to power generation facilities, which are usually natural monopolies: ‘Then capacity drawing rights are allocated among several co-owners in proportion to the fixed capital cost borne by each. Each user has a small condominium package of capacity, and each benefits from the low unit cost of a large facility’. As opposed to the presently existing cotenancy contracts, these cotenancy contracts would allow for unilateral capacity expansions, without compulsory agreement from all remaining contenants. In effect, this analogs free market entry. To wager such a radical change in institutional arrangement would be foolish if there were no empirical basis for its desired success. Here is where the laboratory has been essential: these new arrangements are based on economic theory and information gleaned in ‘past experiments about the economics of incentives; on field experience with component building blocks, such as the cotenancy contract; on the enormous power of the computer to construct new forms of exchange.. .; and on the experimental laboratory where our incentive design errors can be corrected at low cost before the proposals are tried elsewhere’. In summary, the need for laboratory experiments in which true consumer behavior is tested against economic theory or traditional statistical or econometric methods has become more than an academic exercise, it is a practical necessity. The scope and depth of its application is limited only by the creativity of the experimenters, the capacity of their computers and the willingness of their subjects.
Institut
Elizabeth Harrison and Christian Seidl fiir Finanzwissenschaft, Universitlt Kiel D - 2300 Kiel, Germany
References Coase, R., 1960, The problem of social cost, Journal of Law and Economics 3, l-44. Hoffman, E. and M.L. Spitzer, 1985, Entitlements, rights, and fairness: An experimental examination of subjects’ concept of distributive justice, Journal of Legal Studies 14, 259-297. Nash, J.F., 1950, The bargaining problem, Econometrica 18, 155-162. Nash, J.F., 1953, Two-person cooperative games, Econometrica 21, 128-140. Yaari, M.E. and M. Bar-Hillel, 1984, On dividing justly, Social Choice and Welfare 1, I-24.
Oliver Hart and John Moore, Property rights and the nature Journal of Political Economy (1990), no. 6, 1119-l 158.
of the firm,
Hart and Moore consider a two-stage setting. At date 0, individual agents invest in human capital. At date 1, coalition formation, production and the
Article reviews
629
distribution of the ‘cake’ take place. The economic environment is quite complicated and hence at date 0 it is impossible to write a contract about how to share any revenue among the agents. Sharing therefore takes place at date 1 under symmetric information. The revenue is shared according to the Shapley value. A firm is treated as a collection of physical assets and the decisive question which individual agents should own to be answered is the following: (=control) which physical assets to guarantee that total revenue is as high as possible? Accordingly, the setting-up of a firm deals with property rights, incentives and transactions: (a) property rights: who should own which assets given technological particularities which may refer to the relation of assets to each other, f.i. asset complementarity; to the relation of agents to each other, Ei. agent’s dispensability; and to the relation of agents and assets, f.i. asset specificity. (b) incentives: since the results of the human investments are shared at date 1, some of the increased productivity which results from an agent’s investment is dissipated according to the Shapley value. This is a disincentive leading to underinvestment. (c) transactions: the distribution of property rights decides when transactions should be carried out within a lirm and when through the market. Many of the ideas of Hart and Moore’s paper have been around for a while; the authors themselves give due credit to Williamson and others. What is new, however, and impressed me, is the precise formal way in which the relation between property rights, incentives and transactions is developed into an integrated theory of the firm and the distribution of property rights. In my opinion the Hart-Moore framework provides an important further step in our understanding of the nature of a firm. Much further work and discussion can be done along the lines of this paper.
Institut
fiir Gesellschafts-
P.M. Romer, Endogenous (1990) 71-103.
Dieter Bos und Wirtschaftswissenschaften, Universitat Bonn D-5300 Bonn, Germany technical
change,
Journal
of Political
Economy
The economic analysis of technical change is still rather neglected in our discipline. This situation contradicts with the great importance one has to attach to the role technology plays in our society at large and in daily economic life, in particular. Economic growth, market power, employment, public choice, pollution are all issues of empirical relevance and economic
Article
reviews
this mechanism, the facility and its operations are held in a separate management company with multiple co-owners who compete to supply services using the common facility’. This arrangement can be easily extended to power generation facilities, which are usually natural monopolies: ‘Then capacity drawing rights are allocated among several co-owners in proportion to the fixed capital cost borne by each. Each user has a small condominium package of capacity, and each benefits from the low unit cost of a large facility’. As opposed to the presently existing cotenancy contracts, these cotenancy contracts would allow for unilateral capacity expansions, without compulsory agreement from all remaining contenants. In effect, this analogs free market entry. To wager such a radical change in institutional arrangement would be foolish if there were no empirical basis for its desired success. Here is where the laboratory has been essential: these new arrangements are based on economic theory and information gleaned in ‘past experiments about the economics of incentives; on field experience with component building blocks, such as the cotenancy contract; on the enormous power of the computer to construct new forms of exchange.. .; and on the experimental laboratory where our incentive design errors can be corrected at low cost before the proposals are tried elsewhere’. In summary, the need for laboratory experiments in which true consumer behavior is tested against economic theory or traditional statistical or econometric methods has become more than an academic exercise, it is a practical necessity. The scope and depth of its application is limited only by the creativity of the experimenters, the capacity of their computers and the willingness of their subjects.
Institut
Elizabeth Harrison and Christian Seidl fiir Finanzwissenschaft, Universitlt Kiel D - 2300 Kiel, Germany
References Coase, R., 1960, The problem of social cost, Journal of Law and Economics 3, l-44. Hoffman, E. and M.L. Spitzer, 1985, Entitlements, rights, and fairness: An experimental examination of subjects’ concept of distributive justice, Journal of Legal Studies 14, 259-297. Nash, J.F., 1950, The bargaining problem, Econometrica 18, 155-162. Nash, J.F., 1953, Two-person cooperative games, Econometrica 21, 128-140. Yaari, M.E. and M. Bar-Hillel, 1984, On dividing justly, Social Choice and Welfare 1, I-24.
Oliver Hart and John Moore, Property rights and the nature Journal of Political Economy (1990), no. 6, 1119-l 158.
of the firm,
Hart and Moore consider a two-stage setting. At date 0, individual agents invest in human capital. At date 1, coalition formation, production and the
Article reviews
629
distribution of the ‘cake’ take place. The economic environment is quite complicated and hence at date 0 it is impossible to write a contract about how to share any revenue among the agents. Sharing therefore takes place at date 1 under symmetric information. The revenue is shared according to the Shapley value. A firm is treated as a collection of physical assets and the decisive question which individual agents should own to be answered is the following: (=control) which physical assets to guarantee that total revenue is as high as possible? Accordingly, the setting-up of a firm deals with property rights, incentives and transactions: (a) property rights: who should own which assets given technological particularities which may refer to the relation of assets to each other, f.i. asset complementarity; to the relation of agents to each other, Ei. agent’s dispensability; and to the relation of agents and assets, f.i. asset specificity. (b) incentives: since the results of the human investments are shared at date 1, some of the increased productivity which results from an agent’s investment is dissipated according to the Shapley value. This is a disincentive leading to underinvestment. (c) transactions: the distribution of property rights decides when transactions should be carried out within a lirm and when through the market. Many of the ideas of Hart and Moore’s paper have been around for a while; the authors themselves give due credit to Williamson and others. What is new, however, and impressed me, is the precise formal way in which the relation between property rights, incentives and transactions is developed into an integrated theory of the firm and the distribution of property rights. In my opinion the Hart-Moore framework provides an important further step in our understanding of the nature of a firm. Much further work and discussion can be done along the lines of this paper.
Institut
fiir Gesellschafts-
P.M. Romer, Endogenous (1990) 71-103.
Dieter Bos und Wirtschaftswissenschaften, Universitat Bonn D-5300 Bonn, Germany technical
change,
Journal
of Political
Economy
The economic analysis of technical change is still rather neglected in our discipline. This situation contradicts with the great importance one has to attach to the role technology plays in our society at large and in daily economic life, in particular. Economic growth, market power, employment, public choice, pollution are all issues of empirical relevance and economic