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Sequential Investments and Options to Own

Author

Listed:
  • Klaus Schmidt
Abstract
Contingent ownership structures are prevalent in joint ventures. This paper offers an explanation based on the investment incentives provided by such an arrangement. We consider a hold-up problem in which two parties make relationship-specific investments sequentially in order 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.

Suggested Citation

  • Klaus Schmidt, 1998. "Sequential Investments and Options to Own," CESifo Working Paper Series 160, CESifo.
    • Handle: RePEc:ces:ceswps:_160
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    References listed on IDEAS

    as
    1. Aaron S. Edlin & Benjamin E. Hermalin, 1997. "Contract Renegotiation in Agency Problems," Microeconomics 9705002, University Library of Munich, Germany.
    2. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August.
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    7. James Dearden & Dorothy Klotz, 1996. "Investment timing and efficiency in incomplete contracts," Review of Economic Design, Springer;Society for Economic Design, vol. 2(1), pages 369-378, December.
    8. Nöldeke, Georg & Schmidt, Klaus M., 1995. "Option contracts and renegotiation," Munich Reprints in Economics 19329, University of Munich, Department of Economics.
    9. Georg Noldeke & Klaus M. Schmidt, 1995. "Option Contracts and Renegotiation: A Solution to the Hold-Up Problem," RAND Journal of Economics, The RAND Corporation, vol. 26(2), pages 163-179, Summer.
    10. Gianni de Fraja, "undated". "After You Sir. Sequential Investment as a Solution to the Hold-Up Problem," Discussion Papers 95/23, Department of Economics, University of York.
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    More about this item

    Keywords

    Options; Convertible Securities; Property Rights; Incomplete Contracts;
    All these keywords.

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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