Relational Contracts and the Theory of the Firm: A Renegotiation-Proof Approach

I analyze the effect of long-term relations on the property rights theory of the firm when agents’s actions affect the structure of the game. In this setting, renegotiation proof relational contracts exists. Single ownership dominates joint ownership when the discount factor is very high or very low, however there exists a mid-region where joint ownership becomes optimal. Joint ownership has a higher chance of being optimal in industries where agents’ actions affect the structure of the game, i.e. where reputation and network effects are important.