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Joint Ownership And Incomplete Contracts: The Case Of Perfectly Substitutable Investments

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  • Stephanie Rosenkranz
  • Patrick W. Schmitz

Abstract

Important results of the property rights approach based on incomplete contracts, as outlined by Hart (1995), say that all ownership structures lead to underinvestment and that joint ownership cannot be optimal, provided that investments are strategic complements and affect human capital only. We show that when only the total amount invested matters, these conclusions are still true in a static setting, even if investments are in physical capital. However, if the parties can invest and generate a surplus twice, then joint ownership may imply first-best investments in the first stage and can well be the optimal ownership structure.

Suggested Citation

  • Stephanie Rosenkranz & Patrick W. Schmitz, 2004. "Joint Ownership And Incomplete Contracts: The Case Of Perfectly Substitutable Investments," Schmalenbach Business Review (sbr), LMU Munich School of Management, vol. 56(1), pages 72-89, January.
  • Handle: RePEc:sbr:abstra:v:56:y:2004:i:1:p:72-89
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    1. repec:bla:jecsur:v:31:y:2017:i:1:p:281-302 is not listed on IDEAS
    2. Rosenkranz, Stephanie & Schmitz, Patrick W., 2003. "Optimal allocation of ownership rights in dynamic R&D alliances," Games and Economic Behavior, Elsevier, vol. 43(1), pages 153-173, April.
    3. Andreas Roider, 2004. "Asset Ownership and Contractibility of Interaction," RAND Journal of Economics, The RAND Corporation, vol. 35(4), pages 787-802, Winter.
    4. repec:eee:touman:v:45:y:2014:i:c:p:3-15 is not listed on IDEAS
    5. Gattai, Valeria & Natale, Piergiovanna, 2013. "What makes a joint venture: Micro-evidence from Sino-Italian contracts," Review of Financial Economics, Elsevier, vol. 22(4), pages 194-205.
    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.
    7. Blonski, Matthias & Spagnolo, Giancarlo, 2002. "Relational Contracts and Property Rights," CEPR Discussion Papers 3460, C.E.P.R. Discussion Papers.
    8. Schmitz, Patrick W., 2008. "Joint ownership and the hold-up problem under asymmetric information," Economics Letters, Elsevier, vol. 99(3), pages 577-580, June.

    More about this item

    Keywords

    Incomplete Contracts; Property Rights; Repeated Games.;

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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