Munich Personal RePEc Archive

Incomplete Contracts, Limited Liability, and the Optimality of Joint Ownership

Schmitz, Patrick W. (2019): Incomplete Contracts, Limited Liability, and the Optimality of Joint Ownership. Published in: Economics Letters , Vol. 183, No. Article 108558 (2019)

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Abstract

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.

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