On the Foundations of the Property Rights Theory of the Firm: Cooperative Investments and Message-Dependent Contracts
U of Bonn, Economics Discussion Paper No. 12/2000
37 Pages Posted: 15 Jan 2003
Date Written: October 2000
The property-rights theory assumes that trade is non-contractible ex-ante and focusses exclusively on the allocation of property-rights. We derive foundations for this focus on property-rights by identifying scenarios where only one of the simple ownership structures is optimal even though trade is contractible. In these scenarios it is optimal: (1) not to sign a trade contract; (2a) to sign a partially enforced trade contract; (2b) such a combination of asset ownership and a trade contract might even achieve the first-best. For the purpose of identifying the optimal simple ownership structure, trade contracts can be neclected in scenarios (2a) and (2b).
Keywords: Property Rights, Incomplete Contracts, Specific Investments
JEL Classification: D23, D82, L14, L22
Suggested Citation: Suggested Citation