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Incomplete contracts, limited liability, and the optimality of joint ownership

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  • Schmitz, Patrick W.

Abstract

The property rights approach to the theory of the firm is the most prominent application of the incomplete contracting paradigm. A central conclusion of the standard model says that joint ownership is suboptimal. We analyze a modified version of the standard model that is tailored to the organization of R&D activities, where one of the parties is wealth-constrained and protected by limited liability. It turns out that joint ownership can be optimal, since it avoids wasteful rent-seeking activities when limited liability rents are necessary to induce high effort. Our results are in line with the fact that R&D activities are often conducted in research joint ventures.

Suggested Citation

  • Schmitz, Patrick W., 2019. "Incomplete contracts, limited liability, and the optimality of joint ownership," Economics Letters, Elsevier, vol. 183(C), pages 1-1.
    • Handle: RePEc:eee:ecolet:v:183:y:2019:i:c:22
    DOI: 10.1016/j.econlet.2019.108558
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    Cited by:

    1. Jiancai Pi, 2021. "An investigation of seeming favoritism in public procurement," Manchester School, University of Manchester, vol. 89(1), pages 128-137, January.

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    More about this item

    Keywords

    Property rights; Incomplete contracts; Limited liability; Rent seeking; Joint ownership;
    All these keywords.

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D

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