Completely Relationship-Specific Investments, Transaction Costs, and the Property Rights Theory

Patrick Schmitz

No 18048, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: In the property rights approach to the theory of the firm, ownership matters if parties have to make partly relationship-specific investments, but ownership would be irrelevant if the investments were completely relationship-specific. We show that if negotiations after the investment stage require transaction costs to be paid, then ownership matters even when investments are completely relationship-specific. While in the standard model without transaction costs there are underinvestments compared to the first-best benchmark, in our setting a party may overinvest in order to induce the other party to incur the transaction costs that are necessary to enter the negotiation stage

Keywords: Relationship specificity; Incomplete contracts; Investment incentives; Transaction costs; Ownership rights (search for similar items in EconPapers)
JEL-codes: D23 D86 G34 L23 L24 (search for similar items in EconPapers)
Date: 2023-03
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Journal Article: Completely relationship-specific investments, transaction costs, and the property rights theory (2023)
Working Paper: Completely Relationship-Specific Investments, Transaction Costs, and the Property Rights Theory (2023)
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