Assignment 2.

Here is a recent post by Peter Klein on the Organizations and Markets blog:

The transaction cost framework associated with Ben Klein and Oliver Williamson and property-rights approach of Grossman, Hart, and Moore have a complicated relationship, as Bob Gibbons has explained. Clearly, property-rights theory is not simply a formalization of TCE, as is sometimes believed (see Williamson, Whinston, and Whinston again on the differences). One key difference, emphasized by Williamson and by Gibbons, is that the PRT focuses on the alignment of incentives ex ante, assuming efficient bargaining ex post, while TCE emphasizes ex post hazards. 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.

1. Explain what (Peter) Klein means about the difference between the (Ben) Klein/Williamson approach and that of Hart et al.

2. Summarize the Schmitz paper. What assumptions drive the result?

3. Consider now a new paper from Hart: "Hold-up, Asset Ownership, and Reference Points," NBER Working Paper 13540, October 2007. Compare Hart's result (and assumptions) with those of Schmitz. (As always, concentrate on the ideas, not the math.)

Due: February 25.