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Asset ownership and implicit contracts

Bragelien, Iver
Working paper
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bragelien iver 1898_v1_1.pdf (148.1Kb)
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http://hdl.handle.net/11250/163811
Utgivelsesdato
1998-12
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  • Discussion papers (FOR) [531]
Sammendrag
In a setting with two managers/owners who both make relation- and asset-specific investments, I suggest a model where a linear implicit contract can strengthen the incentives to invest, if the parties are sufficiently patient. Otherwise, only asset ownership can be used to influence the incentives. First, I analyze the case where the implicit contract may include a fixed transfer, which then must be paid by the manager with the weakest bargaining position. I argue that this arrangement is not observed in business relations, due to risk aversion, bounded rationality and social norms. Therefore I focus on implicit contracts without fixed transfers in the rest of the paper. The same ownership structure is then optimal under both spot governance and implicit contracting, unless an ownership structure with more symmetrical bargaining positions can support a better implicit contract. In fact, a first-best implicit contract is self-enforcing only when the two managers enjoy similar bargaining positions, even if they are infinitely patient. Choosing between technologies, strong interdependencies can be good, since the future losses associated with an implicit contract violation then are large.
Utgiver
Norwegian School of Economics and Business Administration. Department of Finance and Management Science
Serie
Discussion paper
1998:18

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