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Incomplete Property Rights and Overinvestment

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  • J. Atsu Amegashie

Abstract

I consider a model in which an asset owner must decide how much to invest in his asset mindful of the fact that an encroacher’s valuation of the asset is increasing in the asset owner’s investment. Due to incomplete property rights, the encroacher and asset owner engage in a contest over the control of the asset after investment has taken place. A standard result is that the asset owner will underinvest in the asset relative to the first-best level of investment when property rights are complete. Contrary to this standard result, I find that when the interaction between the asset owner and the encroacher is infinitely repeated and the encroacher has some bargaining power over the size of the transfer from the asset owner to him, then there is a cooperative equilibrium in which the asset owner finds it optimal to over-invest in the asset when property rights are incomplete relative to the first-best level of investment when property rights are complete. Overinvestment is used to induce cooperation. However, this result depends on the encroacher’s bargaining power or, more generally, whether the transfer is an increasing function of investment.

Suggested Citation

  • J. Atsu Amegashie, 2009. "Incomplete Property Rights and Overinvestment," CESifo Working Paper Series 2711, CESifo.
    • Handle: RePEc:ces:ceswps:_2711
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    3. Boudreau, James W. & Shunda, Nicholas, 2015. "Tacit Collusion in Repeated Contests with Noise," MPRA Paper 65671, University Library of Munich, Germany.

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    More about this item

    Keywords

    contests; incomplete information; property rights; investment; transfers;
    All these keywords.

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • D74 - Microeconomics - - Analysis of Collective Decision-Making - - - Conflict; Conflict Resolution; Alliances; Revolutions
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law

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