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Efficiency out of disorder: Contested ownership in incomplete contracts

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  • Kurt Annen

Abstract

In many situations, irreconcilable disagreements between players lead to costly ownership disputes over assets-for example, in case of joint ownership. This article studies the role of such disputes in a situation where two players have to make a transaction-specific investment and when contracts are incomplete. I show that potentially contested ownership may mitigate the inefficiency of investments due to the incompleteness of contracts generating an exchange surplus that comes closer to the first-best surplus as compared to any other ex ante distribution of ownership typically discussed in the literature following the influential work by Grossman, Hart, and Moore. If the contest is an all-pay auction, each player makes a transaction-specific investment as if he or she owns the asset. This article can explain why shared ownership-as for example in equity joint ventures, family firms, start-up partnerships, and so on-is an important part of today's corporate landscape. Copyright (c) 2009, RAND.

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Bibliographic Info

Article provided by RAND Corporation in its journal The RAND Journal of Economics.

Volume (Year): 40 (2009)
Issue (Month): 4 ()
Pages: 597-610

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Handle: RePEc:bla:randje:v:40:y:2009:i:4:p:597-610

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  1. Hart, Oliver & Moore, John, 1990. "Property Rights and the Nature of the Firm," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 98(6), pages 1119-58, December.
  2. Ariel Rubinstein, 2010. "Perfect Equilibrium in a Bargaining Model," Levine's Working Paper Archive 252, David K. Levine.
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  4. Kovenock, D. & de Vries, C.G., 1995. "The All-Pay Auction with Complete Information," UFAE and IAE Working Papers, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC) 311.95, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  5. Yeon-Koo Che & József Sákovics, 2004. "A Dynamic Theory of Holdup," Econometrica, Econometric Society, Econometric Society, vol. 72(4), pages 1063-1103, 07.
  6. Skaperdas, S., 1991. "Cooperation, Conflict And Power In The Absence Of Property Rights," Papers, California Irvine - School of Social Sciences 90-91-06a, California Irvine - School of Social Sciences.
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  8. David De Meza & Ben Lockwood, 1998. "Does Asset Ownership Always Motivate Managers? Outside Options And The Property Rights Theory Of The Firm," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 113(2), pages 361-386, May.
  9. Kurt Annen, 2009. "Efficiency out of disorder: Contested ownership in incomplete contracts," RAND Journal of Economics, RAND Corporation, RAND Corporation, vol. 40(4), pages 597-610.
  10. Maija Halonen, 2002. "Reputation And The Allocation Of Ownership," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 112(481), pages 539-558, July.
  11. Schmitz, Patrick W., 2007. "Joint Ownership and the Hold-up Problem Under Asymmetric Information," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6478, C.E.P.R. Discussion Papers.
  12. Sakovics, J. & Ponsati, C., 1995. "Rubinstein Batgaining with Tow-Sided Options," UFAE and IAE Working Papers, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC) 318.95, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  13. Holmstrom, Bengt, 1999. "The Firm as a Subeconomy," Journal of Law, Economics and Organization, Oxford University Press, Oxford University Press, vol. 15(1), pages 74-102, April.
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Cited by:
  1. Takanori Adachi, 2010. "Ownership Structure as a Continuous Variable: A Note on Joint Ownership in the Grossman-Hart-Moore Theory of the Firm," Economics Bulletin, AccessEcon, vol. 30(3), pages 2112-2118.
  2. Schmitz, Patrick W., 2010. "Contractual solutions to hold-up problems with quality uncertainty and unobservable investments," Journal of Mathematical Economics, Elsevier, vol. 46(5), pages 807-816, September.
  3. Schmitz, Patrick W, 2013. "Investments in physical capital, relationship-specificity, and the property rights approach," CEPR Discussion Papers, C.E.P.R. Discussion Papers 9396, C.E.P.R. Discussion Papers.
  4. Kurt Annen, 2009. "Efficiency out of disorder: Contested ownership in incomplete contracts," RAND Journal of Economics, RAND Corporation, RAND Corporation, vol. 40(4), pages 597-610.
  5. Schmitz, Patrick W., 2010. "On contractual solutions to hold-up problems with quality uncertainty and unobservable investments," MPRA Paper 23157, University Library of Munich, Germany.

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