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Completely Relationship-Specific Investments, Transaction Costs, and the Property Rights Theory

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  • Schmitz, Patrick W.

Abstract

In the property rights approach to the theory of the firm, ownership matters if parties have to make partly relationship-specific investments, but ownership would be irrelevant if the investments were completely relationship-specific. We show that if negotiations after the investment stage require transaction costs to be paid, then ownership matters even when investments are completely relationship-specific. While in the standard model without transaction costs there are underinvestments compared to the first-best benchmark, in our setting a party may overinvest in order to induce the other party to incur the transaction costs that are necessary to enter the negotiation stage.

Suggested Citation

  • Schmitz, Patrick W., 2023. "Completely Relationship-Specific Investments, Transaction Costs, and the Property Rights Theory," MPRA Paper 117065, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:117065
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    References listed on IDEAS

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    1. Schmitz, Patrick W., 2017. "Asymmetric information and the property rights approach to the theory of the firm," Economics Letters, Elsevier, vol. 159(C), pages 96-99.
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    3. 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.
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    6. Albert H. Choi & George Triantis, 2021. "Contract Design When Relationship-Specific Investment Produces Asymmetric Information," The Journal of Legal Studies, University of Chicago Press, vol. 50(2), pages 219-260.
    7. Su, Alice Peng-Ju, 2017. "Information revelation in the Property Right Theory of the firms," International Journal of Industrial Organization, Elsevier, vol. 52(C), pages 133-164.
    8. Luca Anderlini & Leonardo Felli, 2006. "Transaction Costs and the Robustness of the Coase Theorem," Economic Journal, Royal Economic Society, vol. 116(508), pages 223-245, January.
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    13. Müller, Daniel & Schmitz, Patrick W., 2016. "Transaction costs and the property rights approach to the theory of the firm," European Economic Review, Elsevier, vol. 87(C), pages 92-107.
    14. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    incomplete contracts; investment incentives; ownership rights; relationship specificity; transaction costs;
    All these keywords.

    JEL classification:

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

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