Working Paper: CEPR ID: DP5417
Authors: Patrick W. Schmitz
Abstract: The property rights approach to the theory of the firm suggests that ownership structures are chosen in order to provide ex ante investment incentives, while bargaining is ex post efficient. In contrast, transaction cost economics emphasizes ex post inefficiencies. In the present paper, a party may invest and acquire private information about the default payoff that it can realize on its own. Inefficient rent-seeking can overturn prominent implications of the property rights theory. In particular, ownership by party B may be optimal, even though only the indispensable party A makes an investment decision.
Keywords: Incomplete Contracts; Ownership Rights; Theory of the Firm
JEL Codes: D23; L14; L22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Ownership by the investing party (G32) | better investment incentives (G31) |
| Asymmetric information (D82) | inefficient bargaining outcomes (C78) |
| Potential for rent-seeking (D72) | alters optimal ownership structure (G32) |
| Ownership by the non-investing party (H13) | mitigates inefficiencies associated with information gathering (D83) |