The Firm as a Collection of Assets (Now published in European Economic Review, vol.36, Nos.2/3 (1992), pp.493-507.)

The thesis of this paper is that human capital is inalienable: it cannot be bought or sold. Control of physical capital proved the means by which one agent influences another. That is, the pattern of property rights over physical assets is important in the determination of incentives. Recent joint work with Oliver Hart uses this idea in two interrelated ways; See Hart and Moore (1990 and 1991). Viewing the firm as a collection of assets, our first paper analyses how the incentives of employees are affected by changes in ownership. In Section 2 below, I present an extended example to show that the theory can explain some basic notions - e.g., why firms may initially have increasing returns, and then have decreasing returns. The analysis here assumes away wealth constraints. Once the need for firms to raise money is taken into account, the control of phycial capital has another function - that of providing incentives to repay investors. This is the topic of Section 3, which looks at a simple variant of a model of debt taken from our second paper.