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Optimal Ownership Structures in the Presence of Investment Signals

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  • Gürtler, Oliver

Abstract

The property-rights approach to the theory of the firm is extended by introducing distorted signals of the parties.investments. Investment incentives are then given in two ways, by allocating ownership rights and by tying pay to the signal realization. Optimal incentive strength, that is, the weight that a signal is optimally given in a wage contract, depends on two distortions, namely the distortion of the signal from the realized and from the disagreement benefit. Under the optimal ownership structure, the deviations of both investments from their first-best levels are relatively small implying that the relative importance of investment matters. Further, it is shown that most of the Grossman-Hart-Moore results are not robust to an introduction of investment signals.

Suggested Citation

  • Gürtler, Oliver, 2006. "Optimal Ownership Structures in the Presence of Investment Signals," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 103, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  • Handle: RePEc:trf:wpaper:103
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    File URL: https://epub.ub.uni-muenchen.de/13448/1/103.pdf
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    References listed on IDEAS

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    1. 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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    More about this item

    Keywords

    Signal; Property rights; Integration; Distortion;

    JEL classification:

    • D2 - Microeconomics - - Production and Organizations
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior

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