Shared Ownership Versus Third-Party Ownership
19 Pages Posted: 30 Nov 2010 Last revised: 5 Oct 2012
Date Written: October 5, 2012
Competitive advantage is typically based on a unique nexus of firm-specific investments that creates inimitable quasi-rents. As writing complete contracts on how to distribute the quasi-rents is impossible, stakeholders may underinvest in firm-specific assets to avoid the hold-up risk. This paper contrasts two corporate governance models as institutional safeguards for firm-specific investments: shared ownership that assigns the rights of residual control to the firm-specific investors, and third-party ownership that assigns the rights of residual control to independent fiduciaries. We argue that shared ownership entails higher costs of collective decision-making but lower agency costs than third-party ownership. The paper presents testable propositions, conditional on contextual factors, on which governance structure is better able to incentivize and protect firm-specific investments.
Keywords: Corporate Governance, Firm-Specific Investments, Residual Rights of Control, Third-Party Ownership
JEL Classification: G30, G38, K22
Suggested Citation: Suggested Citation