Hold-up and externality: the firm as a nexus of incomplete rights?

The Coasean theory of the firm (Coase in Econometrica 4:386–405, 9 1937) has flourished with the theory of incomplete contracts. Transaction costs in 10 the form of enforcement costs have been deemed to be the main determinants of the 11 decision to ‘make’ versus ‘buy’. Surprisingly, this stream of literature has almost 12 neglected that transaction costs may also generate incomplete property rights (Coase 13 in J Law Econ 3:1–44, 1960). As firm’s activities entail both contractual and 14 property rights, these two domains interfere each other on the decision to carry out a 15 transaction within the firm. When property rights are incomplete, potential exter- 16 nalities may increase the cost of using the price mechanism to procure the assets 17 needed in a given transaction. The resulting ‘Coasean firm’ would not only cen- 18 tralize incomplete contracts under a unified governance system, but it will also 19 aggregate incomplete property rights under a unified ownership structure.