The property rights theory of production networks

Abstract

This paper investigates the formation of production and trading networks in economies with general interdependencies and complex property rights. We argue that the right to exclude, a core tenet of property, grants asset owners local monopoly power that is amplified by an economy's endogenous production network. Our analysis generalizes the exclusion core, a cooperative solution concept based on the right to exclude, to markets with production. We identify sufficient (and essentially necessary) conditions for the nonemptiness of the exclusion core. Multisourcing and a bias toward shorter supply chains emerge in exclusion‐core outcomes. As a methodological contribution, we generalize the top trading cycles algorithm to a production economy and we show that it identifies outcomes in an economy's exclusion core.