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Asset ownership and investment incentives revisited

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De Meza, David and Lockwood, Ben (2000) Asset ownership and investment incentives revisited. Working Paper. Coventry: University of Warwick, Department of Economics. Warwick economic research papers (No.562).

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Abstract

Previous work on the property rights theory of the firm suggests that in the presence of outside options, asset ownership may demotivate managers. This paper shows that this conclusion relies on the assumption that a manager’s outside option only depends on her own investment. In many cases, an asset owner has the opportunity to continue with a project even if the team breaks up. The investments of non-owners may then be devalued, but are typically not wholly lost to the owner. This weakens the bargaining power of the non-owner. So, in the presence of cross effects, outside options do not necessarily overturn the property of the original Grossman-Hart-Moore model that an asset transfer may motivate the gainer and demotivate the loser.

Item Type:

Working or Discussion Paper (Working Paper)

Subjects:

H Social Sciences > HF Commerce

Divisions:

Faculty of Social Sciences > Economics

Library of Congress Subject Headings (LCSH):

Assets (Accounting), Investments, Right of property, Motivation (Psychology)

Series Name:

Warwick economic research papers

Publisher:

University of Warwick, Department of Economics

Place of Publication:

Coventry

Official Date:

May 2000

Dates:

Date	Event
May 2000	Published

Number:

No.562

Number of Pages:

Status:

Not Peer Reviewed

Access rights to Published version:

Open Access

Description:

First version, January 1999; this version May 2000

References:

Binmore,K, A.Shaked, and J.Sutton (1989), “An outside option experiment”, Quarterly Journal of Economics, 104, 753-770
Chandler, A.D.(1977) ”The Visible Hand; The Managerial Revolution in American Business” Belknap Press, Cambridge, Mass
Chiu, Y.S. (1998) ”Noncooperative Bargaining, Hostages and Optimal Asset Ownership” American Economic Review, 88, 882-901
De Meza,D. and B.Lockwood(1998), “Does Asset Ownership Always Motivate Managers? Outside Options and The Property Rights Theory of the Firm”, Quarterly Journal of Economics, 113, 361-386
Grossman,S.J., and O.Hart (1986), “The costs and bene…ts of ownership: a theory of vertical and lateral integration”, Journal of Political Economy, 94, 691-719
Hart,O.(1995), Firms, Contracts, and Financial Structure, Oxford University Press
Hart,O., and J.Moore (1990), “Property rights and the nature of the …rm”, Journal of Political Economy, 98, 1119-1158
Noldeke, G. and K. Schmidt (1998) ”Sequential Investments and Options to Own” Rand Journal of Economics, Winter, vol.29 (4) 633-653.
Peters,T and R.H.Waterman (1982) ”In Search of Excellence” Harper Collins
Sutton,J.(1986), “Non-cooperative bargaining theory: an introduction”, Review of Economic Studies, 53, 709-724

URI:

http://wrap.warwick.ac.uk/id/eprint/1615

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