Property rights, transaction costs, and the limits of the market

Abstract

To clarify the determinants and interaction of property rights and transaction costs, I study the design of the property rights on either a good whose consensual transfer entails a transaction inefficiency or an upstream firm’s input whose random cost is nonverifiable and ex ante non-contractible. More disperse traders’ valuations and larger odds that the upstream party can appropriate the quasi-rent induced by contract incompleteness produce more severe transaction inefficiencies and larger incomplete contracting costs, respectively.