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Efficiency out of disorder: Contested ownership in incomplete contracts


  • Kurt Annen


In many situations, irreconcilable disagreements between players lead to costly ownership disputes over assets-for example, in case of joint ownership. This article studies the role of such disputes in a situation where two players have to make a transaction-specific investment and when contracts are incomplete. I show that potentially contested ownership may mitigate the inefficiency of investments due to the incompleteness of contracts generating an exchange surplus that comes closer to the first-best surplus as compared to any other ex ante distribution of ownership typically discussed in the literature following the influential work by Grossman, Hart, and Moore. If the contest is an all-pay auction, each player makes a transaction-specific investment as if he or she owns the asset. This article can explain why shared ownership-as for example in equity joint ventures, family firms, start-up partnerships, and so on-is an important part of today's corporate landscape. Copyright (c) 2009, RAND.

Suggested Citation

  • Kurt Annen, 2009. "Efficiency out of disorder: Contested ownership in incomplete contracts," RAND Journal of Economics, RAND Corporation, vol. 40(4), pages 597-610.
  • Handle: RePEc:bla:randje:v:40:y:2009:i:4:p:597-610

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    References listed on IDEAS

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    9. Sakovics, J. & Ponsati, C., 1995. "Rubinstein Batgaining with Tow-Sided Options," UFAE and IAE Working Papers 318.95, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
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    Cited by:

    1. Schmitz, Patrick W., 2013. "Investments in physical capital, relationship-specificity, and the property rights approach," Economics Letters, Elsevier, vol. 119(3), pages 336-339.
    2. Takanori Adachi, 2010. "Ownership Structure as a Continuous Variable: A Note on Joint Ownership in the Grossman-Hart-Moore Theory of the Firm," Economics Bulletin, AccessEcon, vol. 30(3), pages 2112-2118.
    3. Müller, Daniel & Schmitz, Patrick W., 2016. "Transaction costs and the property rights approach to the theory of the firm," European Economic Review, Elsevier, vol. 87(C), pages 92-107.
    4. Schmitz, Patrick W., 2010. "Contractual solutions to hold-up problems with quality uncertainty and unobservable investments," Journal of Mathematical Economics, Elsevier, vol. 46(5), pages 807-816, September.
    5. Schmitz, Patrick W., 2010. "On contractual solutions to hold-up problems with quality uncertainty and unobservable investments," MPRA Paper 23157, University Library of Munich, Germany.
    6. Valeria Gattai & Piergiovanna Natale, 2014. "Joint Ventures and the Property Rights Theory of the Firm: a Review of the Literature," Working Papers 287, University of Milano-Bicocca, Department of Economics, revised Dec 2014.

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