Asset Ownership and Contractibility of Interaction

In a property-rights framework, I study how organizational form and quantity contracts interact in generating investment incentives. The model nests standard property-rights and holdup models as special cases. I admit general message-dependent contracts, but provide conditions under which non-contingent contracts are optimal. First, I contribute to the foundation of the property-rights theory: I characterize under which circumstances its predictions are correct when trade is contractible. Second, I study how the optimal use of the incentive instruments depends on the environment. Finally, the model offers a new perspective on the classic Fisher Body case, and it produces implications that are empirically testable. ∗I am very grateful to Urs Schweizer and Georg Nöldeke for their advice. The Editor, Raymond Deneckere, and two anonymous referees have made extremely constructive suggestions that greatly improved the paper. I would also like to thank Gerd Mühlheusser, Patrick Schmitz, Trenton Smith, and seminar participants at Munich, HumboldtUniversity Berlin, and various conferences for helpful discussions. I am also grateful to Yeon-Koo Che, Antoine Faure-Grimaud, Oliver Hart, Gilat Levy, John Moore and Sönje Reiche for comments on an early version of the paper. Financial support from the Graduiertenkolleg “Quantitative Economics” at the University of Bonn and the German Academic Exchange Service (DAAD) is gratefully acknowledged. †University of Bonn, Wirtschaftspolitische Abteilung, Adenauerallee 24-42, 53113 Bonn, Germany; ++49-(0)228739246; [email protected].