Incomplete Contracts, Limited Liability, and the Optimality of Joint Ownership

12 Pages Posted: 22 Aug 2019

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: 2019

Abstract

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

Schmitz, Patrick W., Incomplete Contracts, Limited Liability, and the Optimality of Joint Ownership (2019). Economics Letters, Vol. 183, No. 108558, 2019. Available at SSRN: https://ssrn.com/abstract=3439648

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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