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

Author(s): Patrick W. Schmitz

Publication Date: July 2019

Keyword(s): Incomplete Contracts, joint ownership, limited liability, Property rights and rent seeking

Programme Area(s): Industrial Organization

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.

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Bibliographic Reference

Schmitz, P. 2019. 'Incomplete Contracts, Limited Liability, and the Optimality of Joint Ownership'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=13881