When Should Control Be Shared?

We analyze the costs and benefits of allowing stakeholders in a firm to share control. In our model, there are conflicts among stakeholders and bargaining does not always lead to efficient decision-making. Although the logic of the Coase Theorem is such that bargaining problems lower the efficiency of decision-making regardless of who has control, we show that conflicts among parties favor undivided control over shared control. Shared control is particularly problematic when the redistributive consequences of decisions are difficult to assess. Our model thus provides a theoretical basis for the observation that ownership is typically shared by those with homogenous interests. Finally, when a party has undivided control, we show that it is necessary to place limits on the controlling party’s ability to engage in extortionate negotiations.