Outside Options, Ownership and Incentives Revisited

David de Meza and Ben Lockwood ()

Discussion Papers from University of Exeter, School of Business and Economics

Abstract: Previous work on the property rights theory of the firm suggests that in the presence of outside options, ownership may be counter productive in motivating managers. This paper shows that this conclusion depends on the assumption that a manager's outside option only depends on her own investments. In many cases, an owner has the right to continue with a project even if the team breaks up. The efforts of non owners to enhance productivity may then be devalued, but are typically not wholly lost on the project. This weakens the bargaining power of the non owner, considerably enlarging the circumstances under which outside options are consistent with ownership motivating. In addition, our analysis identifies the possibility that when the right agent owns not only do they put more effort into the enterprise, so does everyone else.

Keywords: PROPERTY RIGHTS; GAME THEORY; DYNAMIC ANALYSIS; INCENTIVES (search for similar items in EconPapers)
JEL-codes: D23 C78 (search for similar items in EconPapers)
Date: 1998

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