Asset Ownership and Contractability of Interaction

Abstract

In a property-rights framework, we study how the organizational form and quantity contracts interact in generating investment incentives. Our model nests standard property-rights and hold-up models as special cases. We admit general message-dependent contracts but provide conditions under which non-contingent contracts are optimal. This allows to fully characterize optimal contracts. First, we contribute to the foundation of the property-rights theory by characterizing under which circumstances its predictions are correct even when trade is contractible. Second, we study how the two incentive instruments interact in our symmetric information framework depending on the environment which is in the spirit of the multitasking literature. Finally, our model has implications for future empirical test of the property-rights theory.

Keywords: Property Rights, Incomplete Contracts, Specific Investments

JEL Classification: D23, D82, L14, L22