Working Paper: CEPR ID: DP13841
Authors: Patrick W. Schmitz
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).
Keywords: Incomplete Contracts; Ownership Rights; Investment Incentives; Relationship Specificity; Moral Hazard
JEL Codes: D23; D86; G34; L23; L24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| ownership by a non-investing party (G32) | higher investment incentives (G31) |
| ownership by the investing party (G32) | lower investment incentives (G31) |
| ex post moral hazard problem (D82) | alters expected returns based on ownership structure (G32) |
| ownership structure (G32) | influences bargaining power (L14) |
| bargaining power (C79) | affects investment decisions (G11) |
| expected rent under non-investing ownership (R21) | more responsive to investment levels (E22) |
| disagreement payoffs under investing ownership (G35) | less responsive to investment levels (E22) |