DP2679 Joint Ownership and Incomplete Contracts: The Case of Perfectly Substitutable Investments

Author(s): Stephanie Rosenkranz, Patrick W. Schmitz
Publication Date: February 2001
Keyword(s): Incomplete Contracts, Joint Ownership
JEL(s): D23, L22
Programme Areas: Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=2679

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 the case of perfectly substitutable investments 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.