Team Production, Sequential Investments and Stochastic Payoffs
AbstractWe investigate a team production problem where two parties sequentially invest to generate a joint surplus. In this framework, it is possible to implement the first best even if the investment return is highly uncertain. The optimal contract entails a basic dichotomy: it is a simple option contract if the investments of both parties are substitutive, and a linear incentive contract if they are complementary. These schemes can be interpreted in terms of asset ownership: for the case of substitutive investments, a conditional ownership structure is optimal while for complementary investments shared equity in combination with a bonus component renders efficiency feasible. In either case, the parties renegotiate the initial arrangement after the first party invested.
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Bibliographic InfoPaper provided by University of Bonn, Germany in its series Bonn Econ Discussion Papers with number bgse6_2001.
Date of creation: Oct 2000
Date of revision:
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Team Production; Asset Ownership; Sequential Investments;
Other versions of this item:
- 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-, September.
- D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
- K12 - Law and Economics - - Basic Areas of Law - - - Contract Law
- L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
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