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Discussion Paper Details

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

Author(s): Patrick W. Schmitz

Publication Date: March 2013

Keyword(s): incomplete contracts, investment incentives, ownership, relationship-specificity and theory of the firm

Programme Area(s): Industrial Organization

Abstract: 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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Bibliographic Reference

Schmitz, P. 2013. 'Investments in physical capital, relationship-specificity, and the property rights approach'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=9396