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)

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: property rights; incomplete contracts; limited liability; rent seeking; joint ownership
• Subjects: D - Microeconomics > D2 - Production and Organizations > D23 - Organizational Behavior ; Transaction Costs ; Property Rights; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D86 - Economics of Contract: Theory; L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L24 - Contracting Out ; Joint Ventures ; Technology Licensing; O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights > O32 - Management of Technological Innovation and R&D

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