Working Paper: CEPR ID: DP9281
Authors: Patrick W. Schmitz
Abstract: In the property rights approach to the theory of the firm (Hart, 1995), parties bargain about whether or not to collaborate after non-contractible investments have been made. Most contributions apply the regular Nash bargaining solution. We explore the implications of using the generalized Nash bargaining solution. A prominent finding regarding the suboptimality of joint ownership turns out to be robust. However, in contrast to the standard property rights model, it may well be optimal to give ownership to a party whose investments are less productive, provided that this party's ex-post bargaining power is relatively small.
Keywords: bargaining; incomplete contracts; investment incentives; ownership
JEL Codes: C78; D23; D86; L23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| bargaining power (C79) | investment incentives (O31) |
| ownership structure (G32) | investment incentives (O31) |
| bargaining power (C79) | ownership structure (G32) |
| ownership by party with more productive investments (P26) | optimal ownership allocation (G11) |
| ex-post bargaining power (D43) | ownership assignment (R21) |
| ownership to party with weaker bargaining power (L14) | investment incentives (O31) |