Power in a theory of the firm

Transactions take place in the firm rather than in the market because the firm offers power to agents who make specific investments. Past literature emphasizes the allocation of ownership as the primary mechanism by which the firm does this. Within the contractibility assumptions of this literature, we identify a potentially superior mechanism, the regulation of access to critical resources. Access can be better than ownership because (i) the power agents get from access is more contingent on their making the right investment and (ii) ownership has adverse effects on the incentive to specialize. The theory explains the importance of internal organization and third-party ownership.