Working Paper: CEPR ID: DP9396
Authors: Patrick W. Schmitz
Abstract: We reconsider the property rights approach to the theory of the firm based on incomplete contracts. We explore the implications of different degrees of relationship-specificity when there are two parties, A and B, who can make investments in physical capital (instead of human capital). If relationship-specificity is exogenously given, it turns out that joint asset ownership can be optimal only if the degree of relationship-specificity is sufficiently small. If relationship-specificity can be freely chosen and if party A's investments are more productive, then the parties deliberately choose a strictly positive level of relationship-specificity and they always agree on sole ownership by party A.
Keywords: Incomplete Contracts; Investment Incentives; Ownership; Relationship Specificity; Theory of the Firm
JEL Codes: C78; D23; D86; L22; 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 (G31) |
| Relationship Specificity (L14) | Joint Ownership (G32) |
| Endogenous Choice of Relationship Specificity (L14) | Ownership Structure (G32) |
| Relationship Specificity (L14) | Sole Ownership (H13) |
| Joint Ownership (G32) | Investment Levels (G11) |
| Ownership Structure (G32) | Investment Behavior (G11) |