DP9281 Bargaining position, bargaining power, and the property rights approach

Author(s): Patrick W. Schmitz
Publication Date: January 2013
Keyword(s): bargaining, incomplete contracts, investment incentives, ownership
JEL(s): C78, D23, D86, L23
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=9281

In the property rights approach to the theory of the firm (Hart, 1995), parties bargain about whether or not to collaborate after non-contractible investments have been made. Most contributions apply the regular Nash bargaining solution. We explore the implications of using the generalized Nash bargaining solution. A prominent finding regarding the suboptimality of joint ownership turns out to be robust. However, in contrast to the standard property rights model, it may well be optimal to give ownership to a party whose investments are less productive, provided that this party's ex-post bargaining power is relatively small.