Public markets, private orderings and corporate governance

In the New Property Rights approach the degree of incompleteness of markets is taken independently of the cost of the public ordering and of their efficiency relatively to private orderings. In this approach "public markets," similarly to a Swiss cheese, are either assumed to be nonexistent empty holes (because of infinite third party verification costs) or assumed to be smooth and efficient (because of zero third party verification costs). When we allow for positive but not infinite third party verification costs we are necessarily pushed back to the insights of Commons, Cease, Fuller and Williamson. The degree of (in)completeness of public markets becomes an endogenous economic problem and managers can be seen as agents that make "second order" specific investments to run specific relations that cannot be efficiently handled by public markets. Managers and the public authorities build respectively private and public "legal equilibria" that set the working rules within which transactions can take place. Private and public legal equilibria are not only substitutes but also complements. This complementarity is an important source of the path dependency that characterizes the development of different legal systems. The framework is applied to GM's acquisition of Fisher Body. We suggest that, contrary to the claims of the New property Rights approach, the advantages of the acquisition were not due to the superior incentives of the new private owners but should be rather related to the replacement of public markets by the new private ordering set up by Alfred Sloan. (C) 2000 Elsevier Science Inc. All rights reserved.