Third Parties and Specific Investments

Gerald Eisenkopf () and Stephan Nüesch ()
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Gerald Eisenkopf: University of Konstanz
Stephan Nüesch: Westfälische Wilhelms-Universität Münster

Schmalenbach Business Review, 2016, vol. 17, issue 2, No 3, 172 pages

Abstract: Abstract Competitive advantage is typically based on a unique nexus of firm-specific investments that creates inimitable quasi-rents. Because it is impossible to write complete contracts on how to distribute the quasi-rents, stakeholders tend to underinvest in firm-specific assets to avoid the hold-up risk. This paper empirically tests the effect of third-party ownership on specific investments. Third-party ownership assigns the rights of residual control to independent fiduciaries. We conduct variations of the trust game, in which a third party, rather than the receiver, distributes the returns on investments. A randomly chosen third party with a fixed payment induces larger investments over time although the experimental design rules out reputation building. If receivers select the third parties, this benefit vanishes. If the third party receives a reward for the appointment, investments actually decrease. Investors (unwarrantedly) fear lower back transfers in such cases.

Keywords: Third Parties; Specific Investments; Residual Control; Experiment (search for similar items in EconPapers)
JEL-codes: D23 D33 D72 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (4)

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DOI: 10.1007/s41464-016-0014-7

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