2016 Nobel Laureate in Economics, Hart and Property Rights Theory

Oliver Hart is a native of England and is a well-known banker. His father is a famous tuberculosis research expert. But Hart seems to be not interested in the banking industry, and he does not intend to inherit his father's business, but shows a greater interest in mathematics. In 1969, he received a bachelor's degree in mathematics from King's College, Cambridge. Since then, Hart turned his interest to economics, and obtained a master's degree in economics from the University of Warwick in 1972. He received his Ph.D. from Princeton University in 1974. (Note that it usually takes at least four or five years to get a Ph.D. from Princeton, and Hart only takes two years from a master's degree to a doctorate!) After receiving his postdoc, Hart returned to the UK and started his work. His teaching career has been taught at well-known institutions such as Cambridge University and London School of Economics. In 1984, Hart once again traveled across the ocean to the United States, where he had studied and lived, and began to serve as a professor at the Massachusetts Institute of Technology.

In 1993, Hart left MIT, who had worked for ten years, and came to Harvard University, another top school in the town of Cambridge, and has been working until today. Some introductions to Hart highlight the fact that he once visited the head of the Department of Economics at Harvard University. I don’t want to mention this point. For foreign scholars, they will not be in the eyes of administrative duties in the district. The habit of mentioning this title in order to introduce respect to him, I am afraid that the professor may not be sympathetic.

Oliver Hart is the main pioneer of the theory of property rights. The theory of property rights he proposed with Grosman and Moore has become an important branch of new institutional economics, and has been widely used in corporate finance, political theory and other fields.

Oleph VS Ole Buddha: Property Rights Theory and Transaction Cost Theory

Mentioning Professor O'Reilly Hart's thoughts, I have to mention the theory of another Oleph-New Konobel Prize winner, Professor Oliver Williamson. In general, the theory of property rights advocated by Professor Hart and Professor Williamson's transaction cost theory is a relationship of "unity and struggle." From the perspective of origin, these two theories are the interpretation of the contract theory in traditional institutional economics, and belong to the so-called incomplete contract theory.

What is an incomplete contract? Professor Hart explained this: First, because the world is always full of uncertainty, people can never predict all the future; second, even if people can expect all in the future In the case, it is difficult for the signatory parties to write these into the contract in a common language. Third, even if the signing parties can reach an agreement, it is difficult for them to submit the contents of the contract to a third party.

To give an example of apothesis, suppose a person who does not like spicy food goes to a restaurant to eat. Before ordering, ask the waiter: "Is this dish very spicy?" The waiter said: "Not spicy." So this person is relieved. Ordered. But when the dish came up, it was found to be so hot! So, the person refused to pay. At this time, if the two parties resorted to the court, then the court could not justify the ruling, because the judge could not say what is spicy, what is not spicy. This example is a good illustration of the main idea of ​​an incomplete contract: the process by which a diners go to a restaurant to order, is a process of contracting. The diners can't expect the spicy food in the restaurant, which is the first meaning of the incomplete contract. The diners and waiters may all know a certain degree of spicy, but because the diners are afraid of spicy, the waiters are not afraid of spicy, so the two have completely different judgments on the same objective degree of spicyness, which embodies the second incomplete contract. Layer meaning. Even if the two sides reached a consensus that the dish was not spicy, in the event of a dispute, the court as a third party could not make a ruling based on this consensus, which embodies the third meaning of the incomplete contract.

Since the contract itself is always incomplete, this gives the signing party a chance to “rip the bar” or engage in opportunistic action. With this in mind, the signing parties may not be able to reach a contract in advance. Obviously, this will seriously affect the overall efficiency of society.

So how can we solve the incomplete problem of the contract? In the last issue, we introduced the prescription prescribed by Professor Williamson, that is, the implementation of "integration." If the two are controversial, then simply two and one family, the family will not say two words. Regrettably, this view is really not true. "A family does not speak two words" has proved to be wrong in many cases. In fact, in many cases, after turning a company into an employee of another company, it can't reduce its opportunistic behavior. The phenomenon of smashing and smashing will also exist.

To understand this, we can look back at the Time Warner and AOL mergers and acquisitions known as "the most failed mergers in history."

On January 10, 2000, AOL announced the acquisition of Time Warner Inc. for $181 billion, making it the largest merger in the history of the United States and the world. Although AOL and Time Warner’s hands were seen as a match before the merger, it was proved that the merger was a terrible “marriage”. Shortly after the merger, the performance of the new company fell sharply. In 2002, the company's losses amounted to US$98.7 billion, equivalent to the sum of GDP between Chile and Vietnam. In the decline of performance, the company also experienced high-level personnel changes, corporate internal cultural conflicts and other events. In May 2009, this unfortunate marriage finally came to an end. Time Warner announced that the company and AOL will sign a “divorce agreement” and will officially “divide” at the end of this year.

Since it is "the most failed merger in history", of course, there are many reasons. But here I just want to mention one point: after the US online acquisition of Time Warner, sent a staff to take over the business of the original Time Warner. But the former Time Warner's accustomed to the suits and seriousness of the staff seem to be very accustomed to the new IT cowboys who are leading the way, not to cooperate. From a management point of view, this can be attributed to the conflict of corporate culture, and if it is from an economic point of view, this phenomenon shows that “integration” does not eliminate the opportunistic behavior after the event: how much of our company was written in the acquisition contract Everyone is under your control, but does not say how we work, do not cooperate, does not violate the contract? This case presents a major challenge to Williamson's theory. Hart's theory begins here.

"Residual claim": Who owns it

In order to overcome the predicament in Williamson's theory, Professor Hart proposed the concept of "remaining control." Isn't the contract impossible? If the future is not expected, unclear, or unclear, then one of the possible options for avoiding the signing of the contracting parties is to hand over the power to make a decision when these situations occur. The right to make a choice of this camera is the so-called "remaining control." “Residual control” is a big power – as long as there is no clear power in the contract, the party with “remaining control” can decide on its own. Legend has it that when the revolutionary pioneers of the former Soviet Union drafted the Bolshevik party constitution, some people thought that the party constitution was too vague. However, Lenin explained: "The ambiguity of the party constitution is a sign of the power of the Bolsheviks" - once needed, the Bolsheviks can explain the provisions of the party constitution at any time to adapt to changes in the objective situation. This example is actually a good interpretation of "remaining control."

In Hart's theory, "remaining control" is equivalent to ownership. Obviously, when the contract is not complete, the different distribution methods of ownership will affect the prior investment status of the contracting parties. To give a popular example, the old society in our country has the saying that "the daughter who married her daughter poured out the water." At that time, the status of women was low. After the marriage contract was reached, the “remaining control” was entirely in the man’s family. In this way, before the marriage, the woman's parents did not have any incentive to invest in it, which caused a long-term "women's incompetence is the virtue". Now that the times have changed, women’s rights have greatly increased, so the women’s parents are more willing to spend money on their daughters.

So, since the "residual claim" is so important, who can own it? Hart's explanation is that this depends mainly on the negotiating power of the signing parties. Assuming that a dedicated investment (including investment in human capital) must rely on an asset, the size of the bargaining power depends on who owns the asset and how much. According to the theory of property rights, in an enterprise who owns assets and who has more assets, he has more words to have “remaining control” or, more precisely, “remaining control” without controversy. . Therefore, from Hart's property rights theory, a business is a combination of (non-human) material assets. It is the use of material assets as a binder to bring people together and produce the business that everyone sees.

Going back to the examples of Time Warner and AOL, why are Time Warners dissatisfied with AOL? It’s not so much a cultural conflict as a change in the status of the two sides brought about by changes in assets. Since the US IT industry flourished before the merger, AOL had a high market value. From the perspective of property rights theory, it has no doubt that it has “remaining control”. However, in the process of mergers and acquisitions, the United States experienced the bursting of the IT bubble, and the market value of AOL fell all the way, causing it to completely lose its advantage in terms of assets for Time Warner. In this context, the employees of the original Time Warner are very easy to understand. The Explanation of Property Rights Theory to Enterprise Boundaries

What is the enterprise? Where are the boundaries of the enterprise? These two issues are the most fundamental issues in corporate theory. Beginning with Coase, a large number of economists have tried to explain these two issues, and Hart's theory of property rights is no exception.

As mentioned earlier, Hart sees the enterprise as a collection of materials, which has already answered the first question. So how does Hart answer the second question? Similar to the previous theory, Hart's property rights theory also analyzes this problem from the cost-benefit comparison of enterprise integration. Suppose there are two companies, A and B. If two companies each retain ownership of physical assets, then the two companies are independent. If A purchases the material assets of B, then it is called A to acquire B, or to integrate B. In this process, what are the benefits and costs of Enterprise A? According to the theory of property rights, both of these are related to the prior investment of the companies. If A expects to acquire B and has residual control over B, which will be more dominant in cooperation with B, then before the merger occurs, A will have incentives to increase investment in special assets. This is merger or acquisition. Income. Conversely, if B expects to be acquired and loses control over the rest, then it will reduce the enthusiasm for the special investment in ex ante relationship, which is the cost of integration. If the benefits of integration exceed the cost of integration, then integration is effective; conversely, if the benefits of integration are lower than the costs of integration, then integration is ineffective. And the boundaries of the enterprise should be extended to the point where integration can no longer bring effective benefits.

Then, if A and B are integrated, how should reasonable property rights arrangements be arranged? According to the property rights theory, the ownership or the remaining ownership should be given to the important party of investment, which can better encourage them to invest in advance. .

Explanation of Property Rights Theory on Corporate Finance and Corporate Governance

Like Williamson's transaction cost theory, Hart's property rights theory also attempts to explain issues such as capital structure and corporate governance. Following the consistent view, property rights theory regards the company's financing process as a process of contractual conclusion. The business operators use the stock or bonds to finance, and according to the three reasons mentioned above, the contract cannot be complete. Hart and Moore in a paper, that is, "the income stream of the enterprise cannot be confirmed." Under this circumstance, the operators of the enterprise may “steal the funds” of the enterprise – it is good to buy 12 million chandeliers for the company’s money, and buy a special plane for themselves. Anyway, entrepreneurs always have a way to use them. Corporate money does its own thing. In the face of this possibility, in order to prevent the financial misappropriation of business operators as much as possible, what financial tools should be used for financing? Hartde's answer is the most "hard" bond to the enterprise. "When you come out, you always have to pay back." If the money is borrowed, it will always be paid back, and you will not be able to go bankrupt! Because bankruptcy liquidation has caused a huge punishment threat to the operators of the company, it can effectively reduce The act of “stealing” funds by the operator.

After emphasizing the importance of bankruptcy liquidation rights, Hart and others further studied the best bankruptcy procedures when companies could not perform. Hart and others realized that because companies may have many creditors, they may launch inefficient competition, resulting in unnecessary waste. Therefore, control cannot be simply handed over to creditors, and an appropriate procedure is designed to guide negotiations between creditors. Hart et al. suggested that creditors should be turned into shareholders and then voted to determine the future of the company. Debt-to-equity swaps! I don’t know if this move in China’s state-owned enterprise reform was learned from Hart.

(Text / Chen Yongwei is a researcher and assistant to the director of the Center for Market and Network Economy of Peking University)