Transactions take place in the firm rather than in the market because
the firm offers power to agents who make specific investments. Past li
terature emphasizes the allocation of ownership as the primary mechani
sm by which the firm does this. Within the contractibility assumptions
of this literature, we identify a potentially superior mechanism, the
regulation of access to critical resources. Access can be better than
ownership because (i) the power agents get from access is more contin
gent on their making the right investment and (ii) ownership has adver
se effects on the incentive to specialize. The theory explains the imp
ortance of internal organization and third-party ownership.