Working Paper: CEPR ID: DP12174
Authors: Patrick W. Schmitz
Abstract: In the Grossman-Hart-Moore property rights approach to the theory of the firm, it is usually assumed that information is symmetric. Ownership matters for investment incentives, provided that investments are partly relationship-specific. We study the case of completely relationship-specific investments (i.e., the disagreement payoffs do not depend on the investments). It turns out that if there is asymmetric information, then ownership matters for investment incentives and for the expected total surplus. Specifically, giving ownership to party B can be optimal, even when only party A has to make an investment decision and even when the owner's expected disagreement payoff is larger under A-ownership.
Keywords: property rights; relationship specificity; investment incentives; private information; incomplete contracts
JEL Codes: D23; D82; D86; L23; L24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| ownership structure (G32) | investment decisions (G11) |
| ownership structure (G32) | expected total surplus (D46) |
| B-ownership (G32) | expected total surplus (D46) |
| A-ownership (G32) | expected total surplus (D46) |
| investment decisions (G11) | expected total surplus (D46) |