1. Property rights perspective on value creation-Kim & Mahoney (2002)
Anand RV
9/14/2017

2. Major thesis
RBV suggests that resources that are valuable, rare, inimitable and non-substitutable increase the likelihood of value creation
Then why is it so difficult to extract value from all such resources?
Because stakeholders also care about property rights
As property rights become more difficult to establish value creation becomes more difficult
This paper examines this difficulty through the example of oil field unitization

3. Connections with other works
Coase (1960)
Properties as bundles of rights
Alchian & Demsetz (1972)
What are these bundles?
Grossman & Hart (1986)
Move from transaction specific control rights to residual rights
Kim & Mahoney (2002)
Provides a framework for understanding why residual rights are critical
Klein, Mahoney , McGahan, Pitelis (2013)
How PRT aligns with stakeholder theory

4. Resource Based View
Makes a simplistic assumption that property rights are secure?
“Resource-based theory implicitly assumes that resources are secure due to the inherent attributes of the resources as well as being effectively protected by third-party enforcement and self-enforcing agreements such as mutual sunk cost commitments to support ex- change (Williamson, 1985; Mahoney and Pandian, 1992)”
The natural question to ask would be why
despite such resources
despite enforcement
it is difficult to create value?
The answer may reside in the difficulty of determining property rights

5. Property Rights Theory
Property rights are social institutions
that help determine who can do what with a resource? see Libecap (1986,1989)
its not just about owning them (resources) but about what you can do with them
Coase (1960) suggests that every property should be seen as a “bundle of rights”
Alchain(1969) then clarifies this bundle
The right to appropriate
The right to use and change form
The right to transfer

6. Why RBV fails?
Because there are transaction costs (searching, bargaining and enforcement)
Because there are agency costs
Property rights theory is in many ways more fundamental
the “right” determines the extent of the transaction costs and the agency problems

7. Why PRT succeeds It lays out the rights of stakeholders clearly
Two broad views
Classical - Coase (what can I do with the resource within the contract?)
Modern - GHM (what can I do with the resource outside the specification of the contract?)
Thus helps in predicting the potential for value creation

8. Foundations of PRT
Coase’s (1937) initial insight was that authority is what makes firms work
Subsequently refined (Coase, 1960) to suggest that property rights are the reason why firms work?
For instance in case a manager is indispensable then don’t buy him out because you cannot retain authority over him
Buy when you can also gain property rights
The difficulty in establishing property rights leads to the need for laws which subsequently have an impact on transaction costs

9. Issues in establishing property rights
Demsetz (1967) / Davis & North (1971) acknowledge importance of property rights
Suggest that as value creation becomes obvious property rights will evolve and so will laws to protect these property rights
But value creation even when obvious may not lead to new property rights because of
political processes
free riding problems

10. Oil Field
An oilfield is an area of rock under the ground that is full of oil or gas or both. Oilfields are typically km (6-12 miles) wide.
Oil is created in a source rock, along with water and gas. Over millions of years, the oil and gas float upwards above the water along a migration path. Oil and gas often rises all the way to the surface of the earth. In other cases, it collects in a reservoir; a rock that has spaces where oil can collect. Sandstone is a good example, in which oil collects in the spaces (pores) between the sand grains. There must also be a trap - a rock structure that forms a seal above and around the reservoir rock. A seal is impermeable - that is, fluids such as oil cannot flow through it. Clay and shale are impermeable and make good seals.
Source:

11. Oil field unitization
RBV conditions are resource heterogeneity, ex post limits to competition, ex ante limits and imperfect resource mobility (Peteraf, 1993)
All of which are present in oil field unitization
So rent appropriation should be plausible from an RBV perspective
But RBV is not sufficient because
Who appropriates matters
Expectations change depending on feedback
So (well defined) property rights matter in the case of oil field unitization

12. Oil field unitization Property rights are assigned to all owners
However each owner is faced with multiple dilemmas on when to drill for oil
Unitization appears to be a valid solution
Yet we see very little of it
Asymmetric information and the likelihood of hold outs
Instead of unitization why not side payments
But side payments are also a problem-can lead to exploitation
Does the Coase theorem then fail?
Why not government intervention?
Also problematic because governments are not apolitical
Not only are property rights important but are also challenging to implement

13. Complementarity btw RBV and PR
“The more valuable the resources, the more incentives there are to make property rights of resources more precise.”
“The more precisely delineated the property rights of resources, the more valuable resources become.” PR
RBV

14. Discussion Questions
As information costs decrease, do property rights offer enough safeguards for value appropriation? Under what contexts would they still continue to matter?
Can a property rights perspective undermine the long-term orientation of stakeholder theory?
What are some of the measures of effective property rights ?