Combining Transaction Cost Economics and the Property Rights Approach

Peter Klein at Organizations and Markets brings to our attention to an interesting paper which attempts to combine the transaction cost framework of the likes of Benjamin Klein and Oliver Williamson with property-rights approach of Grossman, Hart, and Moore.

Klein explains that the transaction cost economcis and the property-rights approach have a complicated relationship. See Bob Gibbons on this point. Klein also emphasises that the property-rights theory is not simply a formalization of the transaction cost framework, as is sometimes claimed. See Williamson, Whinston, and Whinston, for a second time, on this latter point. One key difference, as noted by Klein, and emphasized by Williamson and Gibbons, is that the property-rights approach focuses on the alignment of incentives ex ante, assuming efficient bargaining ex post, while the transaction cost economics emphasizes ex post hazards. Peter Klein goes on to explain,

A recent paper by Patrick Schmitz, "Information Gathering, Transaction Costs, and the Property Rights Approach" (AER, March 2006) tries to reconcile the two perspectives by creating a GHM-style incomplete-contracting model in which parties can obtain private information about their ex post benefit, resulting in inefficient rent-seeking over the realized gains from trade. Under certain circumstances, the PRT conclusions are reversed — i.e., the party with the most important relationship-specific investment should not necessarily own the other party’s investment, as the PRT implies. Worth a read.