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Investments in physical capital, relationship-specificity, and the property rights approach

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  • Schmitz, Patrick W.

Abstract

We reconsider the property rights approach to the theory of the firm based on incomplete contracts. We explore the implications of different degrees of relationship-specificity when there are two parties, A and B, who can make investments in physical capital (instead of human capital). If relationship-specificity is exogenously given, it turns out that joint asset ownership can be optimal only if the degree of relationship-specificity is sufficiently small. If relationship-specificity can be freely chosen and if party A's investments are more productive, then the parties deliberately choose a strictly positive level of relationship-specificity and they always agree on sole ownership by party A.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 45243.

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Date of creation: Mar 2013
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Handle: RePEc:pra:mprapa:45243

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Keywords: ownership; incomplete contracts; relationship-specificity; theory of the firm; investment incentives;

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  1. Oliver Hart & Sanford Grossman, 1985. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Working papers 372, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Maija Halonen, 2002. "Reputation And The Allocation Of Ownership," Economic Journal, Royal Economic Society, vol. 112(481), pages 539-558, July.
  3. 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.
  4. Schmitz, Patrick W., 2007. "Joint Ownership and the Hold-up Problem Under Asymmetric Information," CEPR Discussion Papers 6478, C.E.P.R. Discussion Papers.
  5. Kurt Annen, 2009. "Efficiency out of disorder: Contested ownership in incomplete contracts," RAND Journal of Economics, RAND Corporation, vol. 40(4), pages 597-610.
  6. Oliver Hart, 2011. "Thinking about the Firm: A Review of Daniel Spulber's The Theory of the Firm," Journal of Economic Literature, American Economic Association, vol. 49(1), pages 101-13, March.
  7. Hart, Oliver & Moore, John, 1999. "Foundations of Incomplete Contracts," Review of Economic Studies, Wiley Blackwell, vol. 66(1), pages 115-38, January.
  8. Chiu, Y Stephen, 1998. "Noncooperative Bargaining, Hostages, and Optimal Asset Ownership," American Economic Review, American Economic Association, vol. 88(4), pages 882-901, September.
  9. David De Meza & Ben Lockwood, 1998. "Does Asset Ownership Always Motivate Managers? Outside Options And The Property Rights Theory Of The Firm," The Quarterly Journal of Economics, MIT Press, vol. 113(2), pages 361-386, May.
  10. Jean Tirole, 1999. "Incomplete Contracts: Where Do We Stand?," Econometrica, Econometric Society, vol. 67(4), pages 741-782, July.
  11. Muthoo,Abhinay, 1999. "Bargaining Theory with Applications," Cambridge Books, Cambridge University Press, number 9780521576475, April.
  12. Hart, Oliver D. & Moore, John, 1990. "Property Rights and the Nature of the Firm," Scholarly Articles 3448675, Harvard University Department of Economics.
  13. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817, September.
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