The paper investigates a model where two parties sequentially invest in a joint project (an asset). Investments and the project value are unverifiable, and A is wealth constrained so that an initial outlay must be financed by either agent B or an external investor C, say a bank. We show that an option contract in combination with a loan arrangement facilitates first best investments and any distribution of surplus if renegotiation is infeasible. Moreover, the optimal strike price of the option is shown to differ across financing modes. If renegotiation is admitted, the first best can still be attained unless A's bargaining position is too strong. Otherwise, B financing or C financing may become strictly preferable, and a combination of multiple lenders may be optimal.
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Paper provided by University of Bonn, Germany in its series Bonn Econ Discussion Papers with number
bgse27_2001.
Length: 28 Date of creation: Jul 2001 Date of revision: Handle: RePEc:bon:bonedp:bgse27_2001
Contact details of provider: Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany Fax: +49 228 73 9221 Web page: http://www.bgse.uni-bonn.de/index.php?id=494
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Find related papers by JEL classification: D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Hagedoorn, John & Link, Albert N. & Vonortas, Nicholas S., 2000.
"Research partnerships1,"
Research Policy,
Elsevier, vol. 29(4-5), pages 567-586, April.
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