Sequential Investments and Options to Own

Posted: 13 Aug 1998

See all articles by Klaus M. Schmidt

Klaus M. Schmidt

Ludwig Maximilian University of Munich (LMU) - Faculty of Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Georg Nöldeke

University of Basel; University of Basel

Abstract

Contingent ownership structures are prevalent in joint ventures. We offer an explanation based on the investment incentives provided by such an arrangement. We consider a holdup problem in which two parties make relationship-specific investments sequentially to generate a joint surplus in the future. In our model, the following ownership structure implements first-best investments: one party owns the firm initially, while the other party has the option to buy the firm at a set price at a later date. This result is robust to the possibility of renegotiation and uncertainty.

JEL Classification: L11, L14, L23, G32

Suggested Citation

Schmidt, Klaus M. and Nöldeke, Georg, Sequential Investments and Options to Own. Rand Journal of Economics, Vol. 29, No. 4, Winter 1998. Available at SSRN: https://ssrn.com/abstract=109808

Klaus M. Schmidt (Contact Author)

Ludwig Maximilian University of Munich (LMU) - Faculty of Economics ( email )

Ludwigstrasse 28
Munich, D-80539
Germany
+49 89 2180 3405 (Phone)
+49 89 2180 3510 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Georg Nöldeke

University of Basel ( email )

Peter Merian-Weg 6
Basel, 4002
Switzerland

HOME PAGE: http://sites.google.com/site/georgnoldeke/

University of Basel ( email )

Peter Merian-Weg 6
Basel, 4002
Switzerland

HOME PAGE: http://sites.google.com/site/georgnoldeke/

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