Team Production, Sequential Investments and Stochastic Payoffs

Christoph Lülfesmann ()

Bonn Econ Discussion Papers from University of Bonn, Germany

Abstract: We investigate a team production problem where two parties sequentially invest to generate a joint surplus. In this framework, it is possible to implement the first best even if the investment return is highly uncertain. The optimal contract entails a basic dichotomy: it is a simple option contract if the investments of both parties are substitutive, and a linear incentive contract if they are complementary. These schemes can be interpreted in terms of asset ownership: for the case of substitutive investments, a conditional ownership structure is optimal while for complementary investments shared equity in combination with a bonus component renders efficiency feasible. In either case, the parties renegotiate the initial arrangement after the first party invested.

Keywords: Team Production; Asset Ownership; Sequential Investments (search for similar items in EconPapers)
JEL-codes: D23 K12 L23 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fin and nep-law
Date: 2000-10

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Journal Article: Team Production, Sequential Investments, and Stochastic Payoffs (2001)
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Persistent link: http://EconPapers.repec.org/RePEc:bon:bonedp:bgse6_2001

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