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Incomplete Contracts, Property Rights and Endogenous Outside Options

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  • Antonio Nicita

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  • Massimiliamo Vatiro

    ()

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    Abstract

    This paper extends the framework provided by the so-called GHM approach to a context of endogenous outside options, showing how the optimality of property rights assignment might be reversed. In some cases, non-owners could over-invest in specific assets while having mere access to property rights might not prevent hold-up. Our conclusions suggest that in order to reach the desired optimality features, the design of ownership structure should take into account the dynamics of outside options.

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    File URL: http://www.econ-pol.unisi.it/quaderni/545.pdf
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    Bibliographic Info

    Paper provided by Department of Economics, University of Siena in its series Department of Economics University of Siena with number 545.

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    Date of creation: Oct 2008
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    Handle: RePEc:usi:wpaper:545

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    Keywords: outside options; property rights allocation; hold-up problem;

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    1. 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.
    2. Kalyan Chatterjee & Y. Stephen Chiu, 2000. "When Does Competition Lead to Efficient Investments?," Econometric Society World Congress 2000 Contributed Papers 0518, Econometric Society.
    3. Edlin, Aaron S & Hermalin, Benjamin E, 2000. "Contract Renegotiation and Options in Agency Problems," Journal of Law, Economics and Organization, Oxford University Press, vol. 16(2), pages 395-423, October.
    4. Grossman, Sanford J & Hart, Oliver, 1985. "The Cost and Benefits of Ownership: A Theory of Vertical and Lateral Integration," CEPR Discussion Papers 70, C.E.P.R. Discussion Papers.
    5. Kessler, Anke & Lülfesmann, Christoph, 2000. "The Theory of Human Capital Revisited: On the Interaction of General and Specific Investments," CEPR Discussion Papers 2533, C.E.P.R. Discussion Papers.
    6. Dixit, Avinash, 1980. "The Role of Investment in Entry-Deterrence," Economic Journal, Royal Economic Society, vol. 90(357), pages 95-106, March.
    7. Thomas P. Lyon & Eric Rasmusen, 2004. "Buyer-Option Contracts Restored: Renegotiation, Inefficient Threats, and the Hold-Up Problem," Working Papers 2004-10, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
    8. Martin J. Osborne & Ariel Rubinstein, 2005. "Bargaining and Markets," Levine's Bibliography 666156000000000515, UCLA Department of Economics.
    9. Klein, Benjamin & Crawford, Robert G & Alchian, Armen A, 1978. "Vertical Integration, Appropriable Rents, and the Competitive Contracting Process," Journal of Law and Economics, University of Chicago Press, vol. 21(2), pages 297-326, October.
    10. Hart, Oliver D. & Moore, John, 1990. "Property Rights and the Nature of the Firm," Scholarly Articles 3448675, Harvard University Department of Economics.
    11. Salop, Steven C & Scheffman, David T, 1983. "Raising Rivals' Costs," American Economic Review, American Economic Association, vol. 73(2), pages 267-71, May.
    12. Bolton, Patrick & Whinston, Michael D, 1993. "Incomplete Contracts, Vertical Integration, and Supply Assurance," Review of Economic Studies, Wiley Blackwell, vol. 60(1), pages 121-48, January.
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