A Theory of Entrepreneurial Firms: Property Rights and Partner Uncertainty∗

We develop a theory about the optimal boundaries of entrepreneurial firms. We augment a simple property rights model by introducing uncertainty about whether initial contract-ing partners are also appropriate long-term partners. Individual asset ownership gives en-trepreneurs the freedom to easily leave their partners, whereas joint asset ownership gives entrepreneurs the security that their partners cannot easily leave them. The optimal own-ership structure takes into account not only asset specificity in the current relationship, but also the potential quasi-rents from alternative future relationships. The theory generates novel predictions about the optimal boundaries of entrepreneurial firms, and the dynamics of organizational changes