DP13841 Moral Hazard and the Property Rights Approach to the Theory of the Firm
|Author(s):||Patrick W. Schmitz|
|Publication Date:||July 2019|
|Keyword(s):||Incomplete Contracts, Investment incentives, moral hazard, Ownership rights, relationship specificity|
|JEL(s):||D23, D86, G34, L23, L24|
|Programme Areas:||Industrial Organization|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=13841|
In the Grossman-Hart-Moore property rights theory, there are no frictions ex post (i.e., after non-contractible investments have been sunk). In contrast, in transaction cost economics ex-post frictions play a central role. In this note, we bring the property rights theory closer to transaction cost economics by allowing for ex-post moral hazard. As a consequence, central conclusions of the Grossman-Hart-Moore theory may be overturned. In particular, even though only party A has to make an investment decision, B-ownership can yield higher investment incentives. Moreover, ownership matters even when investments are fully relationship-specific (i.e., when they have no impact on the parties' disagreement payoffs).