But Messrs Grossman and Hart identified a next-best solution: the party that brings the most to any venture in terms of “non-contractible” effort should own the key assets, which in this case is the client list.
So the agent ought to own the list wherever policy renewals are sensitive to sales effort, as in the case of car insurance, for which people tend to shop around more.
The agent would keep the residual rights and be rewarded for the effort to find the right sort of client.
If the insurance firm shirks, the agent can simply sell the policies of a rival firm to his clients.
But in cases where the firm brings more to the party than the sales agent—for example, when clients are “stickier” and the first sale is crucial, as with life insurance—a merger would make more sense.
This framework helps to address one of the questions raised by Coase's original paper: when should a firm “make” and when should it “buy”?
It can be applied to vertical business ties of all kinds.
For instance, franchises have to abide by a few rules that can be set down in a contract, but get to keep the residual profits in exchange for a royalty fee paid to the parent firm.
That is because the important efforts that the parent requires of a franchisee are not easy to put in a contract or to enforce.
The management of ties between a firm and its “stakeholders” (its customers, suppliers, employees and investors) is another variation on this theme.
A firm often wants to put restraints on the parties it does business with.
Luxury-goods firms or makers of fancy sound equipment may ban retailers from discounting their goods as a way to spur them to compete with rivals on the quality of their shops, service and advice.
If one of the challenges set by Coase was to explain where the boundary between firms and markets lies, another was for economic analysis not to cease once it reached the factory gate or office lobby.
A key issue is how agreements are structured.
Why, for instance, do employment contracts have so few formal obligations?