Joint Ownership and Incomplete Contracts: The Case of Perfectly Substitutable Investments

25 Pages Posted: 28 Feb 2001

See all articles by Stephanie Rosenkranz

Stephanie Rosenkranz

Utrecht University - School of Economics

Patrick W. Schmitz

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

Multiple version iconThere are 2 versions of this paper

Date Written: February 2001

Abstract

Prominent results of the property rights approach based on incomplete contracts as outlined by Hart (1995) say that all ownership structures lead to underinvestment and that joint ownership cannot be optimal, provided that investments are strategic complements and affect human capital only. We show that in the case of perfectly substitutable investments these conclusions are still true in the static setting, even if investments are in physical capital. However, if the parties can invest and generate a surplus twice, then joint ownership may imply first-best investments in the first stage and can well be the optimal ownership structure.

Keywords: Incomplete Contracts, Joint Ownership

JEL Classification: D23, L22

Suggested Citation

Rosenkranz, Stephanie and Schmitz, Patrick W., Joint Ownership and Incomplete Contracts: The Case of Perfectly Substitutable Investments (February 2001). CEPR Discussion Paper No. 2679. Available at SSRN: https://ssrn.com/abstract=261711

Stephanie Rosenkranz (Contact Author)

Utrecht University - School of Economics ( email )

Kriekenpitplein 21-22
Adam Smith Building
Utrecht, 3584 EC
Netherlands
+31 30 253 9806 (Phone)
+31 30 253 7373 (Fax)

HOME PAGE: http://www.uu.nl/uupublish/defaculteit/persoonlijkepagi/rosenkranz/

Patrick W. Schmitz

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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