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Asymmetric Information and the Property Rights Approach to the Theory of the Firm

Patrick Schmitz

No 12174, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: In the Grossman-Hart-Moore property rights approach to the theory of the firm, it is usually assumed that information is symmetric. Ownership matters for investment incentives, provided that investments are partly relationship-specific. We study the case of completely relationship-specific investments (i.e., the disagreement payoffs do not depend on the investments). It turns out that if there is asymmetric information, then ownership matters for investment incentives and for the expected total surplus. Specifically, giving ownership to party B can be optimal, even when only party A has to make an investment decision and even when the owner's expected disagreement payoff is larger under A-ownership.

Keywords: Incomplete Contracts; Investment incentives; private information; Property rights; relationship specificity (search for similar items in EconPapers)
JEL-codes: D23 D82 D86 L23 L24 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com, nep-cta and nep-mic
Date: 2017-07
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