On the Relation between Asset Ownership and Specific Investments

29 Pages Posted: 15 Mar 2000

See all articles by Joep Sonnemans

Joep Sonnemans

University of Amsterdam - Amsterdam School of Economics (ASE)

Hessel Oosterbeek

University of Amsterdam - Research Institute in Economics & Econometrics (RESAM); Tinbergen Institute Amsterdam (TIA); Institute for the Study of Labor (IZA)

Randolph Sloof

University of Amsterdam - Faculty of Economics & Business (FEB); Tinbergen Institute

Date Written: December 1999

Abstract

We report results from an experiment based on a simplified version of Hart's (1995) property rights theory of the firm. Only one manager invests and this investment is completely specific. In that case the theory predicts that the level of investment is not affected by the level of no-trade payoffs if these payoffs are modeled as threat points (as Hart does). If instead no-trade payoffs are modeled as outside options (as in De Meza and Lockwood, 1998), subgame perfectness predicts that investments are reduced when the no-trade payoff increases from a non-binding (low) level to a binding (high) level.

Our findings contradict these predictions. With threat points, investment levels increase (rather than remain constant) when the investor's no-trade payoff goes up. With outside options, investment levels remain constant (instead of decrease) when the value of the no-trade payoff increases. In all cases considered, the average investment level exceeds the predicted level. Actual investment behavior is consistent with the outcomes of the bargaining stage; investors typically receive a higher return on their investment than predicted. Given this, actual investment behavior is close to optimal.

JEL Classification: C91, D23

Suggested Citation

Sonnemans, Joep and Oosterbeek, Hessel and Sloof, Randolph, On the Relation between Asset Ownership and Specific Investments (December 1999). Available at SSRN: https://ssrn.com/abstract=213349 or http://dx.doi.org/10.2139/ssrn.213349

Joep Sonnemans

University of Amsterdam - Amsterdam School of Economics (ASE) ( email )

Roetersstraat 11
1018 WB Amsterdam
Netherlands
+31 20 525 4249 (Phone)
+31 20 525 5283 (Fax)

Hessel Oosterbeek

University of Amsterdam - Research Institute in Economics & Econometrics (RESAM) ( email )

Roetersstraat 11
Amsterdam
Netherlands
+31 20 525 4242 (Phone)
+31 20 525 5283 (Fax)

HOME PAGE: http://www.fee.uva.nl/scholar/oosterbeek/

Tinbergen Institute Amsterdam (TIA)

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Institute for the Study of Labor (IZA)

P.O. Box 7240
Bonn, D-53072
Germany

Randolph Sloof (Contact Author)

University of Amsterdam - Faculty of Economics & Business (FEB) ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands
+31 20 525 5241 (Phone)
+31 20 525 4310 (Fax)

Tinbergen Institute ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

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