In the standard property rights theory, joint ownership is suboptimal.
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We consider an R&D setup where the agent is protected by limited liability.
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The principal and the agent can develop modifications to the project.
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The agent exerts unobservable effort to come up with an innovation.
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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.