The Property Rights Theory of Production Networks

Maciej Kotowski (University of Notre Dame)




LECTURE: Zoom Virtual Meeting Room

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. The framework is applied to the study of vertical integration and government intervention in supply chains.