The Boundaries of the Firm Revisited

The Boundaries of the Firm Revisited

By John Roberts, Bengt Holmstrom
1998Working Paper No. 1519

Both Transaction Cost Economics and Property Rights Theories offer explanations of the boundaries of the firm based on ideas of ex post bargaining and hold-up. These theories are quite distinct in their empirical predictions, but neither offers a satisfactory account of a large variety of observd practices. We discuss a number of such examples, where the boundaries of the firm seem to be determined by factors other rhan the need to protect investments and where othe mechanisms than the allocation of asset ownership are used to provide investment incentives. These examples indicate the need to enrich out theory of firm boundaries