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Moral hazard 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 theory, there are no frictions ex post (i.e., after non-contractible investments have been sunk). In contrast, in transaction cost economics ex-post frictions play a central role. We bring the property rights theory closer to transaction cost economics by allowing for ex-post moral hazard. As a consequence, central conclusions of the Grossman–Hart–Moore theory may be overturned. In particular, even though only party A has to make an investment decision, B-ownership can yield higher investment incentives. Moreover, ownership matters even when investments are fully relationship-specific (i.e., when they have no impact on the parties’ disagreement payoffs).

Suggested Citation

  • Schmitz, Patrick W., 2020. "Moral hazard and the property rights approach to the theory of the firm," Economics Letters, Elsevier, vol. 186(C).
    • Handle: RePEc:eee:ecolet:v:186:y:2020:i:c:s0165176519302393
    DOI: 10.1016/j.econlet.2019.06.020
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    Cited by:

    1. Schmitz, Patrick W., 2023. "Completely relationship-specific investments, transaction costs, and the property rights theory," Economics Letters, Elsevier, vol. 226(C).
    2. Mori, Yusuke, 2020. "Ex ante investment, ex post adaptation, and joint ownership," Economics Letters, Elsevier, vol. 187(C).
    3. 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

    Incomplete contracts; Ownership rights; Investment incentives; Relationship specificity; Moral hazard;
    All these keywords.

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • 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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