DP9396 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, theory of the firm|
|JEL(s):||C78, D23, D86, L22, L24|
|Programme Areas:||Industrial Organization|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=9396|
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.