DP12174 Asymmetric Information and the Property Rights Approach to the Theory of the Firm

Author(s): Patrick W. Schmitz
Publication Date: July 2017
Keyword(s): Incomplete Contracts, Investment incentives, private information, Property rights, relationship specificity
JEL(s): D23, D82, D86, L23, L24
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=12174

In the Grossman-Hart-Moore property rights approach to the theory of the firm, it is usually assumed that information is symmetric. Ownership matters for investment incentives, provided that investments are partly relationship-specific. We study the case of completely relationship-specific investments (i.e., the disagreement payoffs do not depend on the investments). It turns out that if there is asymmetric information, then ownership matters for investment incentives and for the expected total surplus. Specifically, giving ownership to party B can be optimal, even when only party A has to make an investment decision and even when the owner's expected disagreement payoff is larger under A-ownership.