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Sequential Investments and Options to Own

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  • Klaus Schmidt

Abstract

Contingent ownership structures are prevalent in joint ventures. This paper offers an explanation based on the investment incentives provided by such an arrangement. We consider a hold-up problem in which two parties make relationship-specific investments sequentially in order to generate a joint surplus in the future. In our model, 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.

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  • Klaus Schmidt, 1998. "Sequential Investments and Options to Own," CESifo Working Paper Series 160, CESifo.
    • Handle: RePEc:ces:ceswps:_160
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    References listed on IDEAS

    as
    1. Aaron S. Edlin & Benjamin E. Hermalin, 1997. "Contract Renegotiation in Agency Problems," NBER Working Papers 6086, National Bureau of Economic Research, Inc.
    2. Sahlman, William A., 1990. "The structure and governance of venture-capital organizations," Journal of Financial Economics, Elsevier, vol. 27(2), pages 473-521, October.
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    7. Che, Y.K. & Hausch, D.B., 1996. "Cooperative Investments and the Value of Contracting: Coase vs Williamson," Working papers 9608, Wisconsin Madison - Social Systems.
    8. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817.
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    12. Gianni de Fraja, "undated". "After You Sir. Sequential Investment as a Solution to the Hold-Up Problem," Discussion Papers 95/23, Department of Economics, University of York.
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    More about this item

    Keywords

    Options; Convertible Securities; Property Rights; Incomplete Contracts;
    All these keywords.

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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