DP13881 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, rent seeking
JEL(s): D23, D86, L24, L25, O32
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13881

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.