Writers in transaction cost economics tend to assume that prevailing governance structures maximize aggregate surplus. However, this need not be the case. When investments in firm-specific physical or human assets are non-contractible and input suppliers bargain over quasi-rent, a given organizational form may prevail because it directs quasi-rent to suppliers of specialized assets, even though another organizational form would yield more total surplus. The formal model involves three stages: investment, bargaining, and production. It compares capital-managed firms where investors in physical assets choose output and workers bargain over the wage against labor-managed firms where workers choose output and investors bargain over a rental payment for the use of physical assets. There is free entry of new firms of each type at the investment stage. When one input is generic and the other is specialized, equilibrium organizational forms assign control rights to suppliers of the specialized input. When both inputs are specialized, control rights go to the agent with the weaker bargaining position at the production stage. These outcomes need not maximize aggregate surplus.