Organization (+ Ownership)

Question 1

Organization frameworks

Answer 1

Transaction costs (ex-ante/post)
Better-off/ownership tests

Question 2

Ownership tests

Answer 2

Better-off test: more value (higher qual, lower cost, complementary) together
Ownership test: more value through owning than contracting

Question 3

What does ownership give?

Answer 3

Residual rights of control (control of asset in cases not stated in contract)

Question 4

Ex-ante

Answer 4

Transaction costs before the agreement
- finding parties
- vetting quality
- negotiating terms

Question 5

Ex-post

Answer 5

Transaction costs after the agreement
- Monitoring agreement
- Enforcing agreement

Question 6

Specific assets

Answer 6

Assets have a higher value for a particular transaction (A <—> B) than for any other purpose.

Question 7

Incomplete contracts

Answer 7

Measuring performance is difficult and contingencies are hard to specify
Incomplete contracts + Specific assets suggest single firm integration

Question 8

Wasteful bargaining

Answer 8

Investments made to become attractive to a party, which reduces total profits, but improves bargaining position with that party (reduce pie size but increase slice size)

Question 9

Reasons to merge

Answer 9

Avoid wasteful investments
Avoid higher transaction costs (ex-ante/post)
Provides rights to possess/control assets

Question 10

Considerations of whether to merge or not

Answer 10

Choice among bad alternatives:
- contract leads to transaction costs and loss of residual rights
- ownership leads to loss of incentives and bureaucracy (firm structure wouldn’t fix control problems)

Question 11

Ownership cases

Answer 11

Disney
Disney & Pixar
Bonus: Fisher Body & GM