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Investments in physical capital, relationship-specificity, and the property rights approach

  • Schmitz, Patrick W.

We reconsider the property rights approach to the theory of the firm based on incomplete contracts. We explore the implications of different degrees of relationship-specificity when there are two parties, A and B, who can make investments in physical capital (instead of human capital). If relationship-specificity is exogenously given, it turns out that joint asset ownership can be optimal only if the degree of relationship-specificity is sufficiently small. If relationship-specificity can be freely chosen and if party A's investments are more productive, then the parties deliberately choose a strictly positive level of relationship-specificity and they always agree on sole ownership by party A.

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File URL: https://mpra.ub.uni-muenchen.de/45243/1/MPRA_paper_45243.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 45243.

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Date of creation: Mar 2013
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Handle: RePEc:pra:mprapa:45243
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  1. Oliver Hart & John Moore, 1998. "Foundations of Incomplete Contracts," Harvard Institute of Economic Research Working Papers 1846, Harvard - Institute of Economic Research.
  2. Hart, Oliver D. & Moore, John, 1990. "Property Rights and the Nature of the Firm," Scholarly Articles 3448675, Harvard University Department of Economics.
  3. 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.
  4. Schmitz, Patrick W., 2008. "Joint ownership and the hold-up problem under asymmetric information," Economics Letters, Elsevier, vol. 99(3), pages 577-580, June.
  5. Muthoo,Abhinay, 1999. "Bargaining Theory with Applications," Cambridge Books, Cambridge University Press, number 9780521576475.
  6. 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.
  7. Oliver Hart, 2011. "Thinking about the Firm: A Review of Daniel Spulber's The Theory of the Firm," Journal of Economic Literature, American Economic Association, vol. 49(1), pages 101-13, March.
  8. Maija Halonen, 2002. "Reputation And The Allocation Of Ownership," Economic Journal, Royal Economic Society, vol. 112(481), pages 539-558, July.
  9. Chiu, Y Stephen, 1998. "Noncooperative Bargaining, Hostages, and Optimal Asset Ownership," American Economic Review, American Economic Association, vol. 88(4), pages 882-901, September.
  10. Kurt Annen, 2009. "Efficiency out of disorder: Contested ownership in incomplete contracts," RAND Journal of Economics, RAND Corporation, vol. 40(4), pages 597-610.
  11. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817.
  12. Jean Tirole, 1999. "Incomplete Contracts: Where Do We Stand?," Econometrica, Econometric Society, vol. 67(4), pages 741-782, July.
  13. 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, MIT Press, vol. 113(2), pages 361-386, May.
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