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Universität zu Köln
Wirtschafts- und Sozialwissenschaftliche Fakultät

Staatswissenschaftliches Seminar - Prof. Schmitz

Moral Hazard and the Property Rights Approach to the Theory of the Firm

Patrick W. Schmitz

Economics Letters, Vol. 186, 2020, 108514.

Abstract. In the Grossman-Hart-Moore property rights theory, there are no frictions ex post (i.e., after non-contractible investments have been sunk). In contrast, in transaction cost economics ex-post frictions play a central role. We bring the property rights theory closer to transaction cost economics by allowing for ex-post moral hazard. As a consequence, central conclusions of the Grossman-Hart-Moore theory may be overturned. In particular, even though only party A has to make an investment decision, B-ownership can yield higher investment incentives. Moreover, ownership matters even when investments are fully relationship-specific (i.e., when they have no impact on the parties` disagreement payoffs).

The working paper version is available for download (CEPR Discussion Paper 13841).