In his path-breaking 1937 article, Ronald Coase first identified the determinants of a firm's scope as an important research question. Although Coase's question initially attracted little attention, it has emerged over the last 25 years as a central issue in industrial organization. Much of the literature on firm scope since Coase uses the transaction-cost economics approach (henceforth, the TCE) pioneered by Oliver Williamson (1975, 1979, 1985) and Benjamin Klein et al. (1978). The TCE starts with the assumption that market transactions are plagued by incomplete contracts and the development of lock-in among trading partners. Lock-in leads the value of the relationship to exceed the value of the trading partners' outside alternatives creating what Klein et al. called quasi-rents. Contractual incompleteness gives contracting parties the ability to engage in opportunistic behavior to increase their share of these quasi-rents, leading to efficiency losses in market transactions. Internal procurement, on the other hand, involves its own inefficiencies, most notably the costs of bureaucracy and lowpowered incentives. According to the TCE, the optimal organizational form is found by comparing the efficiencies of these distinct transactional modes. Its primary prediction is that, as market transactions become characterized by increasing levels of quasi-rents and incompleteness in contracts, the likelihood of integration should increase. More recently, a great deal of attention has focused on an alternative theory of firm scope, the property-rights theory (henceforth, the PRT), pioneered by Sanford Grossman and Oliver Hart (1986) and Hart and John Moore (1990) (see also Hart, 1995). Like the TCE, the PRT starts with the assumption that contracts are incomplete and that lock-in often develops among trading partners. It then focuses on how ownership of physical assets, which confers residual rights of control over the assets, alters the efficiency of trading relations. In the process of doing so, the PRT produces a theory that differs from the TCE in three ways. The first is methodological rather than substantive: the PRT is substantially more formal than the (largely verbal) TCE. Second, the PRT focuses on distortions in ex ante investments, in contrast to the ex post haggling costs that are a major focus of the TCE.1 Third, the PRT assumes that efficiency losses are of the same nature in all ownership structures. That is, ownership of physical assets affects the parties' abilities to engage in opportunistic behavior not only in market transactions, but also within the firm. A very large empirical literature exists lending support to the TCE (for one survey, see Howard A. Shelanski and Peter G. Klein [1995]). In a typical study, some measure of lock-in, such as the specificity of the product procured or investments made, is related to the choice of whether to integrate. The strong association that this literature has found between specificity and integration has made the TCE

In recent years, the "leverage theory" of tied good sales has faced heavy and influential criticism. In an important sense, though, the models used by its critics are actually incapable of addressing the leverage theory's central concerns. Here I reconsider the leverage hypothesis and argue that tying can indeed serve as a mechanism for leveraging market power. The mechanism through which this leverage occurs, its profitability, and its welfare implications are discussed in detail.

Why are observed contracts so often incomplete in the sense that they leave contracting parties' obligations vague or unspecified? Traditional answers to this question invoke transaction costs or bounded rationality. In contrast, we argue that such incompleteness is often an essential feature of a well-designed contract. Specifically, once some aspects of performance are unverifiable, it is often optimal to leave other verifiable aspects of performance unspecified. We explore the conditions under which this occurs, and investigate the structure of optimal contracts when these conditions are satisfied.

This paper studies regulated health insurance markets known as exchanges, motivated by the increasingly important role they play in both public and private insurance provision. We develop a framework that combines data on health outcomes and insurance plan choices for a population of insured individuals with a model of a competitive insurance exchange to predict outcomes under different exchange designs. We apply this framework to examine the effects of regulations that govern insurers' ability to use health status information in pricing. We investigate the welfare implications of these regulations with an emphasis on two potential sources of inefficiency: (i) adverse selection and (ii) premium reclassification risk. We find substantial adverse selection leading to full unraveling of our simulated exchange, even when age can be priced. While the welfare cost of adverse selection is substantial when health status cannot be priced, that of reclassification risk is five times larger when insurers can price based on some health status information. We investigate several extensions including (i) contract design regulation, (ii) self‐insurance through saving and borrowing, and (iii) insurer risk adjustment transfers.

This paper extends the analysis of transactions cost models of vertical integration to multilateral settings. Its main focus is on supply assurance concerns which arise when several downstream firms are competing for inputs in limited supply. Integration reduces supply assurance concerns for an integrating firm but it may increase them for others. Therefore, to explain the scope of any firm, one must consider the overall network of production and distribution relations. Three fundamental questions are addressed: (1) What are the effects of different integration structures?; (2) What are the determinants of the socially efficient integration structures?; (3) In what way do equilibrium integration structures differ from socially efficient structures?

The paper studies bilateral contracting between one principal and N agents when each agent's utility depends on the principal's unobservable contracts with other agents. We show that allowing deviations to menu contracts from which the principal chooses bounds equilibrium outcomes in a wide class of bilateral contracting games without imposing ad hoc restrictions on the agents' beliefs. This bound yields, for example, competitive convergence as N →∞ in environments in which an appropriately-defined notion of competitive equilibrium exists. We also examine the additional restrictions arising in two common bilateral contracting games: the “offer game” in which the principal makes simultaneous offers to the agents, and the “bidding game” in which the agents make simultaneous offers to the principal.

The paper studies the implementation problem, first analyzed by Maskin and Moore (1999), in which two agents observe an unverifiable state of nature and may renegotiate inefficient outcomes following play of the mechanism. We develop a first-order approach to characterizing the set of implementable utility mappings in this problem, paralleling Mirrlees's (1971) first-order analysis of standard mechanism design problems. We use this characterization to study optimal contracting in hold-up and risk-sharing models. In particular, we examine when the contracting parties can optimally restrict attention to simple contracts, such as noncontingent contracts and option contracts (where only one agent sends a message).

In many examples of competitive bidding (e.g., government construction contracting) the relevant object is either partially divisible or ill-defined, in contrast to much of the recent theoretical work on auctions. In this paper we consider a more general class of auctions, in which bidders name a “menu” of offers for various possible actions (allocations) available to the auctioneer. We focus upon “first-price” menu auctions under the assumption of complete information, and show that, for an attractive refinement of the set of Nash Equilibria, an efficient action always results. Our model also has application to situations of economic influence, in which interested parties independently attempt to influence a decision-maker's action.

[We extend the principal-agent framework with risk-neutral principals to situations in which several principals simultaneously and independently attempt to influence a common agent. We show that implementation is, in the aggregate, always efficient (cost-minimizing), and that noncooperative behavior induces an efficient (potentially second-best) action choice if and only if collusion among the principals would implement the first-best action at the first-best level of cost. We also investigate the existence of equilibria, the distribution of net rewards among principals, the characteristics of actions chosen in inefficient equilibria, and potential institutional remedies for welfare losses induced by noncooperative behavior.]

Concentration-based thresholds for horizontal mergers, such as those in the US Horizontal Merger Guidelines, play a central role in merger analysis but their basis remains unclear. We show that there is both a theoretical and an empirical basis for focusing solely on the change in concentration, and ignoring its level, in screening mergers for whether their unilateral price effects will harm consumers. We also argue that current threshold levels likely are too lax, unless one expects efficiency gains of 5 percent or greater, or other factors such as entry and product repositioning to significantly constrain the exercise of market power postmerger.