Abstract
This paper enriches the celebrated Grossman–Hart–Moore (GHM) property rights model with employment relationships. By combining the GHM view of the firm as a bundle of asset ownerships with that of Alchian and Demsetz (1972), who viewed the firm as a nexus of contracts, the model yields, in some cases, optimal asset ownership different from the implications of the GHM model. We show that the nexus of contracts is a meaningful instrument to govern transactions even in the presence of asset ownership. The optimal contractual network structure depends on the relationship-specificity of investments, unlike the GHM model where the asset ownership depends solely on the asset specificity of investments.
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