Sequential investments and options to own

Nöldeke, Georg; Schmidt, Klaus M. (1998): Sequential investments and options to own. In: RAND Journal of Economics, Vol. 29, No. 4: pp. 633-653

Abstract

Contingent ownership structures are prevalent in joint ventures. We offer an explanation based on the investment incentives provided by such an arrangement. We consider a holdup problem in which two parties make relationship-specific investments sequentially to generate a joint surplus in the future. In our model, the following ownership structure implements first-best investments: one party owns the firm initially, while the other party has the option to buy the firm at a set price at a later date. This result is robust to the possibility of renegotiation and uncertainty.

• Item Type: Journal article
• Keywords: Options contracts; Return on investment; Ownership rights; Investment decisions; Surplus; Induced investment; Price efficiency; Joint ownership; Bargaining power; Structural capital
• Faculties: Economics; Economics > Chairs > Seminar for Economic Theory
• Subjects: 300 Social sciences > 330 Economics
• ISSN: 1756-2171; 0741-6261
• Language: English