Risk Preferences and Asset Ownership: Integrating Prospect Theory and Transaction Cost Economics

Aleksey Martynov and Donald J. Schepker

Managerial and Decision Economics, 2017, vol. 38, issue 2, 125-143

Abstract: We integrate prospect theory into the discussion of Transaction Cost Economics (TCE) to illustrate how risk aversion may affect integration decisions. In particular, we argue that risk aversion creates incentives to acquire assets in situations where neither opportunism nor transaction‐specific investments are present, provided the assets in question can change in value unpredictably during their use. Our theory illustrates that risk aversion could connect opportunism, asset specificity, and uncertainty with integration decisions in the presence of incomplete contracts. Our theory complements and extends TCE by showing the role of risk aversion in integration decisions under bounded rationality and contract incompleteness. Copyright © 2015 John Wiley & Sons, Ltd.

Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:wly:mgtdec:v:38:y:2017:i:2:p:125-143

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