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The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration

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Hart_CostsBenefits.pdf (2.98 MB)

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1986

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10.1086/261404

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University of Chicago Press
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Grossman, Sanford J., and Oliver D. Hart. 1986. The costs and benefits of ownership: A theory of vertical and lateral integration. Journal of Political Economy 94(4): 691-719.

Abstract

Our theory of costly contracts emphasizes that contractual rights can be of two types: specific rights and residual rights. When it is costly to list all specific rights over assets in the contract, it may be optimal to let one party purchase all residual rights. Ownership is the purchase of these residual rights. When residual rights are purchased by one party, they are lost by a second party, and this inevitably creates distortions. Firm 1 purchases firm 2 when firm 1's control increases the productivity of its management more than the loss of control decreases the productivity of firm 2's management.

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http://nrs.harvard.edu/urn-3:HUL.InstRepos:3450060

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I am writing this from India, I am trying to understand the impact of global trade on firms. I specifically wanted to understand the Grossman and Hart theory in modelling this from the Indian perspective. Particularly, what this means for Indian firms seeking to increase it's global footprint.