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Asymmetric Information 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 approach to the theory of the firm, it is usually assumed that information is symmetric. Ownership matters for investment incentives, provided that investments are partly relationship-specific. We study the case of completely relationship-specific investments (i.e., the disagreement payoffs do not depend on the investments). It turns out that if there is asymmetric information, then ownership matters for investment incentives and for the expected total surplus. Specifically, giving ownership to party B can be optimal, even when only party A has to make an investment decision and even when the owner's expected disagreement payoff is larger under A-ownership.

Suggested Citation

  • Schmitz, Patrick W., 2017. "Asymmetric Information and the Property Rights Approach to the Theory of the Firm," CEPR Discussion Papers 12174, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:12174
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    References listed on IDEAS

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    1. Hart, Oliver & Moore, John, 1990. "Property Rights and the Nature of the Firm," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1119-1158, December.
    2. Committee, Nobel Prize, 2016. "Oliver Hart and Bengt Holmström: Contract Theory," Nobel Prize in Economics documents 2016-1, Nobel Prize Committee.
    3. Williamson, Oliver, 2009. "The Theory of the Firm as Governance Structure: From Choice to Contract," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 6, pages 111-134, December.
    4. Oliver Hart & John Moore, 1999. "Foundations of Incomplete Contracts," Review of Economic Studies, Oxford University Press, vol. 66(1), pages 115-138.
    5. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August.
    6. Goldlücke, Susanne & Schmitz, Patrick W., 2014. "Investments as signals of outside options," Journal of Economic Theory, Elsevier, vol. 150(C), pages 683-708.
    7. Myerson, Roger B. & Satterthwaite, Mark A., 1983. "Efficient mechanisms for bilateral trading," Journal of Economic Theory, Elsevier, vol. 29(2), pages 265-281, April.
    8. Aghion, Philippe & Dewatripont, Mathias & Legros, Patrick & Zingales, Luigi (ed.), 2016. "The Impact of Incomplete Contracts on Economics," OUP Catalogue, Oxford University Press, number 9780199826216.
    9. Niko Matouschek, 2004. "Ex Post Inefficiencies in a Property Rights Theory of the Firm," Journal of Law, Economics, and Organization, Oxford University Press, vol. 20(1), pages 125-147, April.
    10. Philippe Aghion & Mathias Dewatripont & Patrick Legros & Luigi Zingales, 2016. "The Impact of Incomplete Contracts on Economics," ULB Institutional Repository 2013/249190, ULB -- Universite Libre de Bruxelles.
    11. repec:eee:ecolet:v:156:y:2017:i:c:p:15-17 is not listed on IDEAS
    12. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817.
    13. Patrick W. Schmitz, 2006. "Information Gathering, Transaction Costs, and the Property Rights Approach," American Economic Review, American Economic Association, vol. 96(1), pages 422-434, March.
    14. Maria Goltsman, 2011. "Optimal information transmission in a holdup problem," RAND Journal of Economics, RAND Corporation, vol. 42(3), pages 495-526, September.
    15. repec:eee:indorg:v:52:y:2017:i:c:p:133-164 is not listed on IDEAS
    16. McKelvey, Richard D. & Page, Talbot, 2002. "Status Quo Bias in Bargaining: An Extension of the Myerson-Satterthwaite Theorem with an Application to the Coase Theorem," Journal of Economic Theory, Elsevier, vol. 107(2), pages 336-355, December.
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    More about this item

    Keywords

    Incomplete Contracts; Investment incentives; private information; Property rights; relationship specificity;

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • 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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