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Moral Hazard 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 theory, there are no frictions ex post (i.e., after non-contractible investments have been sunk). In contrast, in transaction cost economics ex-post frictions play a central role. In this note, we bring the property rights theory closer to transaction cost economics by allowing for ex-post moral hazard. As a consequence, central conclusions of the Grossman-Hart-Moore theory may be overturned. In particular, even though only party A has to make an investment decision, B-ownership can yield higher investment incentives. Moreover, ownership matters even when investments are fully relationship-specific (i.e., when they have no impact on the parties' disagreement payoffs).

Suggested Citation

  • Schmitz, Patrick W., 2020. "Moral Hazard and the Property Rights Approach to the Theory of the Firm," MPRA Paper 97912, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:97912
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    References listed on IDEAS

    as
    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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    More about this item

    Keywords

    incomplete contracts; ownership rights; investment incentives; relationship specificity; moral hazard;

    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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