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Team Production, Sequential Investments and Stochastic Payoffs

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  • Christoph Lülfesmann

Abstract

We 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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File URL: http://www.wiwi.uni-bonn.de/bgsepapers/bonedp/bgse6_2001.pdf
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Bibliographic Info

Paper provided by University of Bonn, Germany in its series Bonn Econ Discussion Papers with number bgse6_2001.

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Length: 15
Date of creation: Oct 2000
Date of revision:
Handle: RePEc:bon:bonedp:bgse6_2001

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Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany
Fax: +49 228 73 6884
Web page: http://www.bgse.uni-bonn.de

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Keywords: Team Production; Asset Ownership; Sequential Investments;

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Cited by:
  1. Kirstein, Roland & Cooter, Robert, 2005. "Anti-Sharing," CSLE Discussion Paper Series 2005-03, Saarland University, CSLE - Center for the Study of Law and Economics.
  2. Keuschnigg, Christian, 2003. "Optimal Public Policy for Venture Capital Backed Innovation," CEPR Discussion Papers 3850, C.E.P.R. Discussion Papers.
  3. Kirstein, Roland, 2004. "Anti-Teilen in Teams," CSLE Discussion Paper Series 2004-04, Saarland University, CSLE - Center for the Study of Law and Economics.

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