Asymmetric Information and the Property Rights Approach to the Theory of the Firm

17 Pages Posted: 25 Jul 2017

See all articles by Patrick W. Schmitz

Patrick W. Schmitz

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

Multiple version iconThere are 2 versions of this paper

Date Written: July 2017

Abstract

In the Grossman-Hart-Moore property rights approach to the theory of the firm, it is usually assumed that information is symmetric. Ownership matters for investment incentives, provided that investments are partly relationship-specific. We study the case of completely relationship-specific investments (i.e., the disagreement payoffs do not depend on the investments). It turns out that if there is asymmetric information, then ownership matters for investment incentives and for the expected total surplus. Specifically, giving ownership to party B can be optimal, even when only party A has to make an investment decision and even when the owner's expected disagreement payoff is larger under A-ownership.

Keywords: Incomplete Contracts, Investment incentives, private information, Property rights, relationship specificity

JEL Classification: D23, D82, D86, L23, L24

Suggested Citation

Schmitz, Patrick W., Asymmetric Information and the Property Rights Approach to the Theory of the Firm (July 2017). CEPR Discussion Paper No. DP12174. Available at SSRN: https://ssrn.com/abstract=3008356

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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