Moral Hazard and the Property Rights Approach to the Theory of the Firm
11 Pages Posted: 17 Jan 2020
Date Written: January 1, 2020
In the Grossman-Hart-Moore property rights theory, there are no frictions ex post (i.e., after non-contractible investments have been sunk). In contrast, in transaction cost economics ex-post frictions play a central role. In this note, we bring the property rights theory closer to transaction cost economics by allowing for ex-post moral hazard. As a consequence, central conclusions of the Grossman-Hart-Moore theory may be overturned. In particular, even though only party A has to make an investment decision, B-ownership can yield higher investment incentives. Moreover, ownership matters even when investments are fully relationship-specific (i.e., when they have no impact on the parties' disagreement payoffs).
Keywords: incomplete contracts, ownership rights, investment incentives, relationship specificity, moral hazard
JEL Classification: D23, D86, G34, L23, L24
Suggested Citation: Suggested Citation