Completely relationship-specific investments, transaction costs, and the property rights theory

Patrick Schmitz

Economics Letters, 2023, vol. 226, issue C

Abstract: In the property rights approach to the theory of the firm, ownership matters if parties have to make partly relationship-specific investments, but ownership would be irrelevant if the investments were completely relationship-specific. We show that if negotiations after the investment stage require transaction costs to be paid, then ownership matters even when investments are completely relationship-specific. While in the standard model without transaction costs there are underinvestments compared to the first-best benchmark, in our setting a party may overinvest in order to induce the other party to incur the transaction costs that are necessary to enter the negotiation stage.

Keywords: Incomplete contracts; Investment incentives; Ownership rights; Relationship specificity; Transaction costs (search for similar items in EconPapers)
JEL-codes: D23 D86 G34 L23 L24 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Completely Relationship-Specific Investments, Transaction Costs, and the Property Rights Theory (2023)
Working Paper: Completely Relationship-Specific Investments, Transaction Costs, and the Property Rights Theory (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:226:y:2023:i:c:s0165176523001283

DOI: 10.1016/j.econlet.2023.111103

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