Moral Hazard and the Property Rights Approach to the Theory of the Firm

Patrick Schmitz

No 13841, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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. In this note, 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: 2019-07
New Economics Papers: this item is included in nep-com, nep-cta, nep-hpe, nep-law and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Moral hazard and the property rights approach to the theory of the firm (2020)
Working Paper: Moral Hazard and the Property Rights Approach to the Theory of the Firm (2020)
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