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

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  • Schmitz, Patrick W.

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.

Suggested Citation

  • Schmitz, Patrick W., 2023. "Completely Relationship-Specific Investments, Transaction Costs, and the Property Rights Theory," MPRA Paper 117065, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:117065
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    References listed on IDEAS

    as
    1. Albert H. Choi & George Triantis, 2021. "Contract Design When Relationship-Specific Investment Produces Asymmetric Information," The Journal of Legal Studies, University of Chicago Press, vol. 50(2), pages 219-260.
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    More about this item

    Keywords

    incomplete contracts; investment incentives; ownership rights; relationship specificity; transaction costs;
    All these keywords.

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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