Contracting with Private Information
This paper adds to the current literature on incomplete contracting that argues that deviating from a complete information, transaction-cost free environment may be may generate valuable insights. We achieve this by assuming bargaining with asymmetric information. We consider the consequences of asymmetric information for investment decisions and for the assignment of property rights. This analysis is crucial since any foundation must ensure that results of the kind derived by Grossman, Hart and Moore still hold. It is shown that investment incentives are guided by an additional element to standard hold-up models since the outcome of bargaining depends directly on the investment level. This may for example result in cooperative overinvestment. Although investment incentives are always positive from a social perspective, they can be negative from an individual's perspective. In our model, property rights are shown to still play a role. This arises from their tight interaction with ex-post bargaining. Optimal ownership structures are characterized and a new role for option contracts is identified.
|Date of creation:||Jan 2003|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: +49 228 3894 223
Fax: +49 228 3894 180
Web page: http://www.iza.org
|Order Information:|| Postal: IZA, Margard Ody, P.O. Box 7240, D-53072 Bonn, Germany|
When requesting a correction, please mention this item's handle: RePEc:iza:izadps:dp690. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mark Fallak)
If references are entirely missing, you can add them using this form.