Working Paper: CEPR ID: DP2679
Authors: Stephanie Rosenkranz; Patrick Schmitz
Abstract: Prominent results of the property rights approach based on incomplete contracts as outlined by Hart (1995) say that all ownership structures lead to underinvestment and that joint ownership cannot be optimal, provided that investments are strategic complements and affect human capital only. We show that in the case of perfectly substitutable investments these conclusions are still true in the static setting, even if investments are in physical capital. However, if the parties can invest and generate a surplus twice, then joint ownership may imply first-best investments in the first stage and can well be the optimal ownership structure.
Keywords: Incomplete Contracts; Joint Ownership
JEL Codes: D23; L22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| joint ownership (R21) | underinvestment (G31) |
| joint ownership (R21) | investment levels (F21) |
| multiple equilibria (D50) | optimal investment behavior (G11) |
| ownership structure (G32) | investment levels (F21) |
| joint ownership (R21) | first-best investments (G11) |