Investments in Physical Capital, Relationship-Specificity, and the Property Rights Approach

16 Pages Posted: 19 Mar 2013

See all articles by Patrick W. Schmitz

Patrick W. Schmitz

University of Cologne; Centre for Economic Policy Research (CEPR)

Date Written: March 2013

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 Classification: C78, D23, D86, L22, L24

Suggested Citation

Schmitz, Patrick W., Investments in Physical Capital, Relationship-Specificity, and the Property Rights Approach (March 2013). CEPR Discussion Paper No. DP9396. Available at SSRN: https://ssrn.com/abstract=2235494

Patrick W. Schmitz (Contact Author)

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

HOME PAGE: http://schmitz.uni-koeln.de/index.php?s=mitarbeiter&t=schmitz

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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