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Team Production, Sequential Investments and Stochastic Payoffs

Listed author(s):
  • Christoph Lülfesmann

We investigate a team production problem where two parties sequentially invest to generate a joint surplus. In this framework, it is possible to implement the first best even if the investment return is highly uncertain. The optimal contract entails a basic dichotomy: it is a simple option contract if the investments of both parties are substitutive, and a linear incentive contract if they are complementary. These schemes can be interpreted in terms of asset ownership: for the case of substitutive investments, a conditional ownership structure is optimal while for complementary investments shared equity in combination with a bonus component renders efficiency feasible. In either case, the parties renegotiate the initial arrangement after the first party invested.

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Paper provided by University of Bonn, Germany in its series Bonn Econ Discussion Papers with number bgse6_2001.

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Length: 15
Date of creation: Oct 2000
Handle: RePEc:bon:bonedp:bgse6_2001
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