Discussion paper

DP9396 Investments in physical capital, relationship-specificity, and the property rights approach

We reconsider the property rights approach to the theory of the firm based on incomplete contracts. We explore the implications of different degrees of relationship-specificity when there are two parties, A and B, who can make investments in physical capital (instead of human capital). If relationship-specificity is exogenously given, it turns out that joint asset ownership can be optimal only if the degree of relationship-specificity is sufficiently small. If relationship-specificity can be freely chosen and if party A's investments are more productive, then the parties deliberately choose a strictly positive level of relationship-specificity and they always agree on sole ownership by party A.

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Citation

Schmitz, P (2013), ‘DP9396 Investments in physical capital, relationship-specificity, and the property rights approach‘, CEPR Discussion Paper No. 9396. CEPR Press, Paris & London. https://cepr.org/publications/dp9396