Sequential Investments and Options to Own

Georg Nöldeke and Klaus Schmidt ()

No 1645, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper analyses the investment incentives given by contingent ownership structures that are prevalent in joint ventures. We consider a variation of the standard hold-up problem where two parties make relationship-specific investments sequentially in order to generate a joint surplus in the future. In many interesting cases, including investments in human and in physical capital, the following ownership structure implements first-best investments: one party owns the firm initially, while the other party has the option to buy the firm at a set price at a later date. This result is robust to the possibility of renegotiation and uncertainty.

Keywords: Incomplete Contracts; Options and Convertible Securities; Property Rights (search for similar items in EconPapers)
JEL-codes: D23 G32 L22 (search for similar items in EconPapers)
Date: 1997-05
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Citations: View citations in EconPapers (24)

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Related works:
Journal Article: Sequential Investments and Options to Own (1998)
Working Paper: Sequential Investments and Options to Own (1998)
Working Paper: Sequential investments and options to own (1998)
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