Incomplete Contracts, Limited Liability, and the Optimality of Joint Ownership
12 Pages Posted: 22 Aug 2019
Date Written: 2019
The property rights approach to the theory of the firm is the most prominent application of the incomplete contracting paradigm. A central conclusion of the standard model says that joint ownership is suboptimal. In this note, we analyze a modified version of the standard model that is tailored to the organization of R&D activities, where one of the parties is wealth-constrained and protected by limited liability. It turns out that joint ownership can be optimal, since it avoids wasteful rent-seeking activities when limited liability rents are necessary to induce high effort. Our results are in line with the fact that R&D activities are often conducted in research joint ventures.
Keywords: property rights, incomplete contracts, limited liability, rent seeking, joint ownership
JEL Classification: D86, D23, L24, L25, O32
Suggested Citation: Suggested Citation