Organizations and Markets

Vaguely Defined Property Rights

| Peter Klein |

The shareholder model of the firm has come under increasing criticism from a variety of quarters. Stakeholder approaches argue that employees, suppliers, customers, community members, and others with relationships to the firm should have their preferences taken into account. Theories of worker empowerment, “flatter hierarchies,” and similar approaches advocate delegating decision rights to employees, not top management. Models of loose and open collaboration treat the firm as simply a node in a cluster or network of firms, with decision authority widely dispersed throughout the larger structure.

All these approaches, despite their differences, reject the standard shareholder model in which the firm’s owners, as residual claimants, possess unique rights of decision management and control. And yet, there is a substantial literature on the organizational costs of alternative models, particularly those in which residual claims are not alienable, separable from other agent roles in the organization, or marketable. These costs have not been widely appreciated in the literature on stakeholder management, worker-managed teams and firms, and the like.

My colleague Mike Cook, a specialist in cooperatives, describes these as costs of “vaguely defined property rights.” Mike argues that  cooperatives, partnerships, and similar structures are plagued by two kinds of free-rider problems, a horizon problem, a portfolio problem, a control problem, and an influence costs problem, all because their equity shares are not alienable assets that trade in secondary markets. Consider each in turn. (more…)

4 April 2007 at 11:00 am Peter G. Klein 14 comments