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Asymmetric Information and the Property Rights Approach to the Theory of the Firm

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  • Schmitz, Patrick W.

Abstract

In the Grossman-Hart-Moore property rights approach to the theory of the firm, it is usually assumed that information is symmetric. Ownership matters for investment incentives, provided that investments are partly relationship-specific. We study the case of completely relationship-specific investments (i.e., the disagreement payoffs do not depend on the investments). It turns out that if there is asymmetric information, then ownership matters for investment incentives and for the expected total surplus. Specifically, giving ownership to party B can be optimal, even when only party A has to make an investment decision and even when the owner's expected disagreement payoff is larger under A-ownership.

Suggested Citation

  • Schmitz, Patrick W., 2017. "Asymmetric Information and the Property Rights Approach to the Theory of the Firm," CEPR Discussion Papers 12174, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:12174
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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, vol. 98(6), pages 1119-1158, December.
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    13. Patrick W. Schmitz, 2006. "Information Gathering, Transaction Costs, and the Property Rights Approach," American Economic Review, American Economic Association, vol. 96(1), pages 422-434, March.
    14. Maria Goltsman, 2011. "Optimal information transmission in a holdup problem," RAND Journal of Economics, RAND Corporation, vol. 42(3), pages 495-526, September.
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    Citations

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    Cited by:

    1. Schmitz, Patrick W., 2021. "On the optimality of outsourcing when vertical integration can mitigate information asymmetries," Economics Letters, Elsevier, vol. 202(C).
    2. Bingham, Logan Robert, 2021. "Vittel as a model case in PES discourse: Review and critical perspective," Ecosystem Services, Elsevier, vol. 48(C).
    3. Patrick W Schmitz, 2022. "How (Not) to Purchase Novel Goods and Services: Specific Performance Versus at-will Contracts," The Economic Journal, Royal Economic Society, vol. 132(647), pages 2563-2577.
    4. Schmitz, Patrick W., 2020. "Moral hazard and the property rights approach to the theory of the firm," Economics Letters, Elsevier, vol. 186(C).
    5. Schmitz, Patrick W., 2023. "Completely relationship-specific investments, transaction costs, and the property rights theory," Economics Letters, Elsevier, vol. 226(C).
    6. Albert H. Choi & George Triantis, 2021. "Contract Design When Relationship-Specific Investment Produces Asymmetric Information," The Journal of Legal Studies, University of Chicago Press, vol. 50(2), pages 219-260.
    7. Mori, Yusuke, 2020. "Ex ante investment, ex post adaptation, and joint ownership," Economics Letters, Elsevier, vol. 187(C).
    8. Oleg Sergeevich Sukharev, 2023. "Intellectual Firm: Key Features and Development Models," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 14(2), pages 1091-1119, June.

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    More about this item

    Keywords

    Property rights; Relationship specificity; Investment incentives; Private information; Incomplete contracts;
    All these keywords.

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures

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