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Incomplete contracts, limited liability, and the optimality of joint ownership

Patrick Schmitz

Economics Letters, 2019, vol. 183, issue C, -

Abstract: The property rights approach to the theory of the firm is the most prominent application of the incomplete contracting paradigm. A central conclusion of the standard model says that joint ownership is suboptimal. We analyze a modified version of the standard model that is tailored to the organization of R&D activities, where one of the parties is wealth-constrained and protected by limited liability. It turns out that joint ownership can be optimal, since it avoids wasteful rent-seeking activities when limited liability rents are necessary to induce high effort. Our results are in line with the fact that R&D activities are often conducted in research joint ventures.

Keywords: Property rights; Incomplete contracts; Limited liability; Rent seeking; Joint ownership (search for similar items in EconPapers)
JEL-codes: D86 D23 L24 L25 O32 (search for similar items in EconPapers)
Date: 2019
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Working Paper: Incomplete Contracts, Limited Liability, and the Optimality of Joint Ownership (2019) Downloads
Working Paper: Incomplete Contracts, Limited Liability, and the Optimality of Joint Ownership (2019) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:183:y:2019:i:c:22

DOI: 10.1016/j.econlet.2019.108558

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