Working Paper: CEPR ID: DP18048
Authors: Patrick W. Schmitz
Abstract: In the property rights approach to the theory of the firm, ownership matters if parties have to make partly relationship-specific investments, but ownership would be irrelevant if the investments were completely relationship-specific. We show that if negotiations after the investment stage require transaction costs to be paid, then ownership matters even when investments are completely relationship-specific. While in the standard model without transaction costs there are underinvestments compared to the first-best benchmark, in our setting a party may overinvest in order to induce the other party to incur the transaction costs that are necessary to enter the negotiation stage
Keywords: Incomplete Contracts; Investment Incentives; Ownership Rights; Relationship Specificity; Transaction Costs
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 structure (G32) | investment incentives (O31) |
| transaction costs (D23) | willingness to enter negotiations (C78) |
| willingness to enter negotiations (C78) | level of investment made by party A (G31) |
| ownership by party A (H13) | investment incentives (O31) |
| ownership by party B (P26) | investment incentives (O31) |
| b-ownership (H13) | total surplus (D46) |
| a-ownership (G32) | total surplus (D46) |