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American Economic Review: Vol. 96 No. 1 (March 2006)

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Information Gathering, Transaction Costs, and the Property Rights Approach

Article Citation

Schmitz, Patrick W. 2006. "Information Gathering, Transaction Costs, and the Property Rights Approach." American Economic Review, 96(1): 422-434.

DOI: 10.1257/000282806776157722

Abstract

The property rights approach to the theory of the firm suggests that ownership structures are chosen in order to provide ex ante investment incentives, while bargaining is ex post efficient. In contrast, transaction cost economics emphasizes ex post inefficiencies. In the present paper, a party may invest and acquire private information about the default payoff that it can realize on its own. Inefficient rent seeking can overturn prominent implications of the property rights theory. In particular, ownership by party B may be optimal, even though only the indispensable party A makes an investment decision.

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Schmitz, Patrick W.


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