Joint Ownership and Incomplete Contracts: The Case of Perfectly Substitutable Investments
Schmalenbach Business Review, Vol. 56, No. 1, pp. 72-89, January 2004
18 Pages Posted: 21 Apr 2004
Prominent results of the property rights approach based on incomplete contracts as outlined by Hart (1995) say that all ownership structures lead to underinvestment and that joint ownership cannot be optimal, provided that investments are strategic complements and affect human capital only. We show that in cases where only the total amount invested matters, these conclusions are still true in the static setting, even if investments are in physical capital. However, if the parties can invest and generate a surplus twice, then joint ownership may imply first-best investments in the first stage and can well be the optimal ownership structure.
Keywords: Incomplete Contracts, Property Rights, Repeated Games
JEL Classification: D23, L14
Suggested Citation: Suggested Citation