Machine, Platform, Crowd: Harnessing Our Digital Future

by Andrew McAfee

In practice, this means that when two people work together on a project and one of them owns an essential asset, like a machine or factory necessary to produce the output, then that owner has the residual rights of control. If either of them comes up with some great new idea to increase the output of the machine, the owner can implement it without further consultation. The nonowner, in contrast, needs the owner’s permission. That requirement gives the owner bargaining power to, for example, insist on a cut of the additional output. TCE calls this the “hold-up problem.” As a result, ownership affects the incentives for innovation, whether large (like a new product idea) or small (like a better way to sort inventory). The bottom line is that changing ownership changes incentives, and therefore results. Employees working with someone else’s assets have different incentives from those of independent contractors who own their own assets. That’s an important reason why firm boundaries matter. A crucial question in the efficient design of a company, a supply chain, or a whole economy is how the assets, and thus incentives, are arranged.