Elsevier

Economics Letters

Volume 183, October 2019, 108558
Economics Letters

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

https://doi.org/10.1016/j.econlet.2019.108558Get rights and content
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Highlights

  • In the standard property rights theory, joint ownership is suboptimal.

  • We consider an R&D setup where the agent is protected by limited liability.

  • The principal and the agent can develop modifications to the project.

  • The agent exerts unobservable effort to come up with an innovation.

  • Joint ownership can be optimal, since it avoids rent-seeking activities.

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.

JEL classification

D86
D23
L24
L25
O32

Keywords

Property rights
Incomplete contracts
Limited liability
Rent seeking
Joint ownership

Cited by (0)

1

I would like to thank an anonymous referee for valuable comments. Moreover, I am grateful to Stephanie Rosenkranz for helpful discussions.