Working paper 03/068

Appropriability, Investment Incentives and the Property Rights Theory of the Firm (PDF, file 338 KB) (PDF, 338kB)

David de Meza and Ben Lockwood

This paper examines the property rights theory of the firm when a manager's relationship-specific investment can be partially appropriated by the owner of an asset when cooperation breaks down. For example ownership typically confers the right to continue with a project even should the production team dissolve. The investments of non-owners may then be devalued, but are seldom wholly loss to the owner. With such spillovers, the outside-option principle can be incorporated into the Grossman-Hart-Moore framework without implying that ownership demotivates. Enriched predictions on the determinants of integration emerge.

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