A formal property rights rationalization of strategy theories

In this article, we propose a formal organizational economics approach to strategic management. Advances in strategy theory have often relied on organizational economics, expressing a logical coherence (Mahoney and Qian, 2013), but formal developments are scarce. Building on recent advances of the modern Property Rights Theory (PRT) – a formal branch of organizational economics – we aim at fulfilling that gap, using conceptual models of the PRT to rationalize and provide a constructive contribution to two of the main strategy theories: the Resource-Based View (RBV) and the Porter Framework (PF).   

    Whereas organizational economics theories such as PRT are viewed as theories of the firm concerned with the existence and the boundaries of the firm, management theories such as the RBV or PF are viewed as theories of competitive advantage more concerned with the creation of economic rents and the question on why firms outperform others. Here, we investigate the link between firm existence and the sustainability of competitive advantage. In particular, we argue that firms garner rents when a particular firm is a socially optimal form of organization for the assets it controls. We show that (1) RBV and PF, beside theories of competitive advantage, can also be viewed as theories of control, and (2) in this concept, they do represent “two sides of the same coin” (Wernerfelt, 1984). 

   In the modern PRT (Grossman and Hart, 1986, Hart and Moore, 1990), ownership of a resource provides residual rights of control and fosters incentives to invest. Resources are bargained over by firms and, at equilibrium, ownership of a resource will go to the firm that can make the best (most efficient) use of it. Otherwise, a more productive firm would buy it as there would be gains from trade that could be shared between the seller and the buyer. The distribution of ownership over assets among firms eventually determines the existence and boundaries of firms.

    In an incomplete contracts setting, we build on Hart and Moore’s (1990) framework and show that the welfare maximizing PRT conditions that characterize the existence and boundaries of a firm are similar to both the RBV and Porter conditions for a sustainable competitive advantage. In particular, we provide a formal rationalization of Barney’s (1991) categorization of resources and Porter’s (1980) generic strategies. In addition, we reveal some underexplored aspects of current informal theories, possibly opening up new avenues for research.