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Team Production, Sequential Investments, and Stochastic Payoffs

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  • Christoph Lülfesmann

Abstract

This paper investigates a team production problem where two parties invest sequentially to generate a joint surplus. We find that the first best can be implemented even if the investment return is highly uncertain. The optimal contract entails a basic dichotomy: it is a simple option contract if investments of both parties are substitutive, and a linear incentive contract if they are complementary. These arrangements can be interpreted in terms of asset ownership, and renegotiation arises in equilibrium after the first agent has invested.

Suggested Citation

  • Christoph Lülfesmann, 2001. "Team Production, Sequential Investments, and Stochastic Payoffs," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 157(3), pages 430-442, September.
    • Handle: RePEc:mhr:jinste:urn:sici:0932-4569(200109)157:3_430:tpsias_2.0.tx_2-8
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    Cited by:

    1. Keuschnigg, Christian, 2003. "Optimal Public Policy for Venture Capital Backed Innovation," CEPR Discussion Papers 3850, C.E.P.R. Discussion Papers.
    2. Kirstein, Roland, 2004. "Anti-Teilen in Teams," CSLE Discussion Paper Series 2004-04, Saarland University, CSLE - Center for the Study of Law and Economics.
    3. Roland Kirstein & Robert Cooter, "undated". "Anti-Sharing," German Working Papers in Law and Economics 2005-1-1131, Berkeley Electronic Press.

    More about this item

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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