Incomplete Contracts, Shared Ownership, and Investment Incentives

33 Pages Posted: 11 Sep 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: August 2017

Abstract

Consider a partnership consisting of two symmetrically informed parties who may each own a share of an asset. It is ex post efficient that tomorrow the party with the larger valuation gets the asset. Yet, today the parties can make investments to enhance the asset's productivity. Contracts are incomplete, so today only the ownership structure can be specified, which may be renegotiated tomorrow. It turns out that shared ownership is often optimal. If the investments are embodied in the physical asset, it may be optimal that party B has a larger ownership share even when party A has a larger valuation and a better investment technology. When shared ownership is taken into account, joint ownership in the sense of bilateral veto power cannot be optimal, regardless of whether the investments are in human capital or in physical capital.

Keywords: Incomplete Contracts, Investment incentives, partnership dissolution, Property rights, shared ownership

JEL Classification: C78, D23, D86, L24, O32

Suggested Citation

Schmitz, Patrick W., Incomplete Contracts, Shared Ownership, and Investment Incentives (August 2017). CEPR Discussion Paper No. DP12258. Available at SSRN: https://ssrn.com/abstract=3031895

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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