Working Paper: CEPR ID: DP1645
Authors: Georg Noldeke; Klaus M. Schmidt
Abstract: This paper analyses the investment incentives given by contingent ownership structures that are prevalent in joint ventures. We consider a variation of the standard hold-up problem where two parties make relationship-specific investments sequentially in order to generate a joint surplus in the future. In many interesting cases, including investments in human and in physical capital, the following ownership structure implements first-best investments: one party owns the firm initially, while the other party has the option to buy the firm at a set price at a later date. This result is robust to the possibility of renegotiation and uncertainty.
Keywords: options and convertible securities; property rights; incomplete contracts
JEL Codes: D23; G32; L22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Ownership structure (A owns, B has option) (G32) | Efficient investment levels (G11) |
| Investment by A (G31) | B exercises option to buy (G13) |
| Investment by A (G31) | B's valuation of the firm increases (G32) |
| Renegotiation and uncertainty (D80) | Investment incentives (G31) |
| Option contract design (G13) | Efficient investments under uncertainty (G11) |