Sequential Investments and Options to Own

Nöldeke, Georg und Schmidt, Klaus M. (1997): Sequential Investments and Options to Own. Discussion Paper / Centre for Economic Policy Research (CEPR),

Abstract

This paper analyses the investment incentives given by contingent ownership structures that are prevalent in joint ventures. We consider a variation of the standard hold-up problem where two parties make relationship-specific investments sequentially in order to generate a joint surplus in the future. In many interesting cases, including investments in human and in physical capital, 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. ; Incomplete Contracts; Options and Convertible Securities; Property Rights

• Item Type: Paper
• Faculties: Economics; Economics > Chairs > Seminar for Economic Theory
• Subjects: 300 Social sciences > 330 Economics
• Language: English