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The existing literature on firms, based on incomplete contracts and property rights, emphasizes that the ownership of assets - and thereby firm boundaries - is determined in such a way as to encourage relationship-specific investments by the appropriate parties. It is generally accepted that this approach applies to owner-managed firms better than to large companies. In this paper, the authors attempt to broaden the scope of the property rights approach by developing a simple model with three key ingredients: decision rights can be transferred ex ante through ownership, managers enjoy private benefits that are non-transferable, and owners can divert a firm's profit.
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