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Production Complementarity and Investment Incentives: Does Asset Ownership Matter?

  • Mumcu, Ayse

This paper analyzes the role of the initial allocation of ownership rights in transactions where parties make relationship-specific investments and contracts are incomplete. If there is high mutual dependence in production, the initial allocation of ownership rights is irrelevant. This result contrasts with Grossman and Hart (1986), who, using a similar model, obtain that the ownership rights should be allocated to minimize ex-ante inefficiencies in production and assets should be owned by the party whose investment is most productive. The critical element behind these two different results is that while Grossman and Hart (1986) model uses the Nash bargaining solution treating status quo payoffs as disagreement points, here they are treated as outside options. The model also shows that, when relevant, asset ownership may provide disincentive to invest.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 1910.

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Date of creation: May 2006
Date of revision:
Handle: RePEc:pra:mprapa:1910
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  1. Hart, Oliver D. & Moore, John, 1990. "Property Rights and the Nature of the Firm," Scholarly Articles 3448675, Harvard University Department of Economics.
  2. John Sutton, 1986. "Non-Cooperative Bargaining Theory: An Introduction," Review of Economic Studies, Oxford University Press, vol. 53(5), pages 709-724.
  3. David de Meza & Ben Lockwood, 1998. "Does Asset Ownership Always Motivate Managers? Outside Options and the Property Rights Theory of the Firm," The Quarterly Journal of Economics, Oxford University Press, vol. 113(2), pages 361-386.
  4. Grossman, Sanford J & Hart, Oliver, 1985. "The Cost and Benefits of Ownership: A Theory of Vertical and Lateral Integration," CEPR Discussion Papers 70, C.E.P.R. Discussion Papers.
  5. Holmstrom, Bengt R. & Tirole, Jean, 1989. "The theory of the firm," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 2, pages 61-133 Elsevier.
  6. Shaked, Avner & Sutton, John, 1984. "Involuntary Unemployment as a Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, vol. 52(6), pages 1351-64, November.
  7. Chiu, Y Stephen, 1998. "Noncooperative Bargaining, Hostages, and Optimal Asset Ownership," American Economic Review, American Economic Association, vol. 88(4), pages 882-901, September.
  8. Ken Binmore & Avner Shared & John Sutton, 1989. "An Outside Option Experiment," The Quarterly Journal of Economics, Oxford University Press, vol. 104(4), pages 753-770.
  9. Bengt Holmstrom & John Roberts, 1998. "The Boundaries of the Firm Revisited," Journal of Economic Perspectives, American Economic Association, vol. 12(4), pages 73-94, Fall.
  10. Michael D. Whinston, 2001. "Assessing the Property Rights and Transaction-Cost Theories of Firm Scope," American Economic Review, American Economic Association, vol. 91(2), pages 184-188, May.
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