Hanssen and Raskovich, ‘Property Rights Theory: Evidence from Hollywood’

What determines the boundaries of the firm? In this paper, we explore that question, using the Grossman, Hart, and Moore property rights theory (PRT) and employing a unique proxy for non-contractible investment. During the famous Hollywood studio era of the 1930s and 1940s, actors worked for movie production companies under de facto lifetime contracts, receiving fixed salaries in return for granting studios control rights and residual claims associated with the films made. Following two mid-1940s court decisions, contracts changed in ways that shifted control rights and residual claims to actors. We develop and test a model of non-contractible investment in talent discovery and find, consistent with the model’s predictions, that actors under studio contract were cast in substantially more film roles (our proxy measure of non-contractible investment in talent discovery) than their contemporaries not under contract, ceteris paribus, or than actors of later eras. We find evidence that investment by vertically integrated (into exhibition) studios was largest, as our model also predicts. In addition, we find some evidence that actor own-investment was weaker during the studio era. We discuss how the process of contracting changed in the post-studio era, and how talent agencies (representing actors) attempted to reconstitute the studio system in the 1950s and 1960s, until stopped by antitrust authorities. Our results demonstrate the importance of residual rights to non-contractible investment, as PRT predicts, while illustrating how, where impediments to legal ownership exist, long-term contracts can create ownership-like incentives.

Hanssen, F Andrew and Raskovich, Alexander, Property Rights Theory: Evidence from Hollywood (October 15, 2015).

First posted 2016-01-09 11:33:16

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