Harold Demsetz

The Structure of Corporate Ownership: Causes and Consequences

This paper argues that the structure of corporate ownership varies systematically in ways that are consistent with value maximization. Among the variables that are empirically significant in explaining the variation in ownership structure for 511 U.S. corporations are firm size, instability of profit rate, whether or not the firm is a regulated utility or financial institution, and whether or not the firm is in the mass media or sports industry. Doubt is cast on the Berle-Means thesis, as no significant relationship is found between ownership concentration and accounting profit rates for this set of firms.

Toward a Theory of Property Rights

When a transaction is concluded in the marketplace, two bundles of property rights are exchanged. A bundle of rights often attaches to a physical commodity or service, but it is the value of the rights that determines the value of what is exchanged. Questions addressed to the emergence and mix of the components of the bundle of rights are prior to those commonly asked by economists. Economists usually take the bundle of property rights as a datum and ask for an explanation of the forces determining the price and the number of units of a good to which these rights attach.

Industry Structure, Market Rivalry, and Public Policy

UANTITATIVE work in industrial organization has been directed mainly to the task of searching for monopoly even though a vast number of other interesting topics have been available to the student of economic organization. The motives for this preoccupation with monopoly are numerous, but important among them are the desire to be policy-relevant and the ease with which industrial concentration data can be secured. This paper takes a critical view of contemporary doctrine in this area and presents data which suggest that this doctrine offers a dangerous base upon which to build a public policy toward business.

The Structure of Ownership and the Theory of the Firm

Provides a model that explains forms of business organizations in terms of ownership structure, on-the-job consumption preferences, and monitoring costs. The thesis of Berle and Means that the separation of ownership and control, or specialized ownership, which characterizes the modern corporation impairs the ability of the profit motive to encourage the most efficient use of resources is critiqued. The idealized owner-managed firm in economic theory operates as a profit-maximizing entity; nevertheless, this idealization rarely holds true for firms generally, even owner-managed ones. Real world businesses often permit on-the-job consumption by managers and employees. In competitive markets, this permitted consumption is traded for reduced monetary compensation. Because on-the-job consumption will take place only when off-the-job consumption would cost more, on-the-job consumption may not represent the dissipation of resources that critics of specialized ownership have contended. The problem of shirking is then taken up and it is shown that specialized ownership puts pressure on non-owner managers to reduce on-the-job consumption to levels even lower than in owner-managed firms. Value-maximizing ownership structure depends on ease of monitoring, desired scale of operations, and the managerial abilities of the potential firm owners. Finally, empirical data is presented against the alleged vacuum in control by owners and it is shown that due to management shareholdings, stock-based managerial income, and sizeable minority shareholdings in modern corporations, a strong linkage continues to exist between management and owner interests. (CAR)

Ownership Structure and Corporate Performance

This paper investigates the relation between the ownership structure and the performance of corporations if ownership is made multi-dimensional and also is treated as an endogenous variable. To our knowledge, no prior study has treated the corporate control problem this way. We find no statistically significant relation between ownership structure and firm performance. This finding is consistent with the view that diffuse ownership, while it may exacerbate some agency problems, also yields compensating advantages that generally offset such problems. Consequently, for data that reflect market-mediated ownership structures, no systematic relation between ownership structure and firm performance is to be expected. q 2001 Elsevier Science B.V. All rights reserved. JEL classification: G32; G34

The Cost of Transacting

Introduction, 33. — The definition and measurement of transaction cost on the New York stock exchange, 35. — The determination of the ask-bid spread, 40. — The determination of the transaction rate, 45. — Statistical results, 46. — Summary and comments, 50. — Appendix I, 52. — Appendix II, 53.

Why Regulate Utilities

Current economic doctrine offers to its students a basic relationship between the number of firms that produce for a given market and the degree to which competitive results will prevail. Stated explicitly or suggested implicitly is the doctrine that price and output can be expected to diverge to a greater extent from their competitive levels the fewer the firms that produce the product for the market. This relationship has provided the logic that motivates much of the research devoted to studying industrial concentration, and it has given considerable support to utility regulation.2

Information and Efficiency: Another Viewpoint

The importance of bringing economic analysis to bear on the problems of efficient economic organization hardly requires comment, but there is a need to review the manner in which the notion of efficiency is used in these problems. The concept of efficiency has been abused frequently because of the particular approach used by many analysts. My aim is to examine the mistakes and the vagueness associated with this approach. I shall focus attention on the problem of efficiently allocating resources to the production of information because in this case the issues stand out clearly. Since Kenneth J. Arrow’s paper ‘Economic Welfare and the Allocation of Resources for Invention’1 has been most influential in establishing the dominant viewpoint about this subject, my commentary necessarily is a critique of Arrow’s analysis.

The Property Right Paradigm

Economics textbooks invariably describe the important economic choices that all societies must make by the following three questions: What goods are to be produced? How are these goods to be produced? Who is to get what is produced? This way of stating social choice problems is misleading. Economic organizations necessarily do resolve these issues in one fashion or another, but even the most centralized societies do not and cannot specify the answer to these questions in advance and in detail. It is more useful and nearer to the truth to view a social system as relying on techniques, rules, or customs to resolve conflicts that arise in the use of scarce resources rather than imagining that societies specify the particular uses to which resources will be put.

Some Aspects of Property Rights

THE tradition in microeconomic theory is to take wants and technology as givens and to proceed from these to deduce from the assumption of scarcity testable implications and normative propositions. These assumptions, together with variety in tastes and abilities and differences in the number of rivals, give rise to most economic laws. In this way, laws such as those that relate to demand, comparative advantage, equalization of factor returns, and the relationship of price to cost are deduced. The role of property rights is not explicitly dealt with in this approach. But imbedded in the whole process is a third class of given datum. There must be assumed a set of social arrangements which define ownership. In this paper, I will examine some aspects of property rights that bear both on issues to which we have been led by the traditional approach and to some which we have ignored because property rights have not been treated explicitly. An example will make clear the necessity of assumptions about social arrangements. Consider the two economic laws which state that (1) demand curves are negatively sloped and that (2) queues will tend to be eliminated by a price that is free to fluctuate. The first law is true even if ownership does not include the right to buy or sell; it does not even depend on the existence of exchange. Thus, from the first law it follows that an increase in the unpleasantness of my neighbor (an increase in the price of association) will diminish the frequency of my visits. Nothing is bought or sold but the law holds true.