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SUNK COSTS OF CAPITAL AND THE FORM OF ENTERPRISE: INVESTOR-OWNED FIRMS AND WORKER-OWNED FIRMS *

Kazuhiko Mikami and Satoru Tanaka

Annals of Public and Cooperative Economics, 2010, vol. 81, issue 1, pages 77-104

Abstract: This paper examines implications of sunk costs of capital for efficient forms of enterprise. It is assumed that firm owners and outside traders are asymmetrically informed of venture risks, and that there are sunk costs associated with investment in physical and human capital. We then make an efficiency comparison between investor-owned and worker-owned firms. We find that the firm is efficient when it is owned by the input supplier (the investor or worker) who incurs large sunk costs. This is because such an input supplier can credibly signal to the other input supplier that he in fact has a safe project. An empirical study based on the Japanese manufacturing industry seems to support the theoretical result. Copyright © 2010 The Authors Journal compilation © CIRIEC 2010.

Date: 2010
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