Property Rights Theory, Transaction Costs Theory, and Agency Theory: An Organizational Economics Approach

Property rights theory has common antecedents with contractual theories of the firm such as transaction costs and agency theories. Yet, property rights theory is distinct from these contractual theories. The objectives of the current paper are to analyze extant property rights theory and to connect property rights theory to more mainstream strategic management perspectives of transaction costs theory and agency theory. We then illustrate fundamental theoretical principles derived from these three organizational economic theories by analyzing the business case of oil field unitization (where a single firm is designated as the unit operator to develop the oil reservoir as a whole) in the United States. Theoretical principles and application of theory to the business case of oil field unitization are each summarized in table format. By comparing the different theoretical perspectives, it is possible to see how property rights theory is well suited to explain business situations where inefficient economic outcomes persist. Furthermore, property rights theory complements transaction costs and agency theories by addressing strategic questions of shared ownership, such as joint ventures, and intellectual property rights. As a general theory of contractual choice, property rights theory bridges the differences between agency and transaction costs theories by requiring residual control rights to match residual rights to income in conceptualizing ownership. Through ownership, property rights theory clarifies the firm's boundary choice. Additionally, property rights theory forges new theoretical connections with other branches of organizational economics that are relevant to strategic management, in particular, resource-based theory.