Working Paper: CEPR ID: DP13881
Authors: Patrick W. Schmitz
Abstract: The property rights approach to the theory of the firm is the most prominent application of the incomplete contracting paradigm. A central conclusion of the standard model says that joint ownership is suboptimal. In this note, we analyze a modified version of the standard model that is tailored to the organization of R&D activities, where one of the parties is wealth-constrained and protected by limited liability. It turns out that joint ownership can be optimal, since it avoids wasteful rent-seeking activities when limited liability rents are necessary to induce high effort. Our results are in line with the fact that R&D activities are often conducted in research joint ventures.
Keywords: property rights; incomplete contracts; limited liability; rent seeking; joint ownership
JEL Codes: D86; D23; L24; L25; O32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Agent Ownership (o_a) (L85) | Wasteful Rent-Seeking Activities (D61) |
| Joint Ownership (o_j) (L24) | Avoidance of Wasteful Rent-Seeking Activities (D61) |
| Principal Ownership (o_p) (H13) | Inefficiencies in Project Outcomes (H43) |
| Joint Ownership (o_j) (L24) | Improved Project Outcomes (O22) |
| Agent Ownership (o_a) (L85) | Inefficiencies in Project Outcomes (H43) |
| Principal Ownership (o_p) (H13) | Wasteful Rent-Seeking Activities (D61) |
| Joint Ownership (o_j) (L24) | Avoidance of Costly Modifications (L15) |