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Moral hazard and the property rights approach to the theory of the firm

Patrick Schmitz

Economics Letters, 2020, vol. 186, issue C

Abstract: In the Grossman–Hart–Moore property rights theory, there are no frictions ex post (i.e., after non-contractible investments have been sunk). In contrast, in transaction cost economics ex-post frictions play a central role. We bring the property rights theory closer to transaction cost economics by allowing for ex-post moral hazard. As a consequence, central conclusions of the Grossman–Hart–Moore theory may be overturned. In particular, even though only party A has to make an investment decision, B-ownership can yield higher investment incentives. Moreover, ownership matters even when investments are fully relationship-specific (i.e., when they have no impact on the parties’ disagreement payoffs).

Keywords: Incomplete contracts; Ownership rights; Investment incentives; Relationship specificity; Moral hazard (search for similar items in EconPapers)
JEL-codes: D23 D86 G34 L23 L24 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Working Paper: Moral Hazard and the Property Rights Approach to the Theory of the Firm (2020) Downloads
Working Paper: Moral Hazard and the Property Rights Approach to the Theory of the Firm (2019) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:186:y:2020:i:c:s0165176519302393

DOI: 10.1016/j.econlet.2019.06.020

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