Team Production, Sequential Investments, and Stochastic Payoffs

Christoph Lülfesmann

Journal of Institutional and Theoretical Economics (JITE), 2001, vol. 157, issue 3, 430-442

Abstract: This paper investigates a team production problem where two parties invest sequentially to generate a joint surplus. We find that the first best can be implemented even if the investment return is highly uncertain. The optimal contract entails a basic dichotomy: it is a simple option contract if investments of both parties are substitutive, and a linear incentive contract if they are complementary. These arrangements can be interpreted in terms of asset ownership, and renegotiation arises in equilibrium after the first agent has invested.

JEL-codes: D23 L20 L22 (search for similar items in EconPapers)
Date: 2001
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Citations: View citations in EconPapers (4)

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