Asset ownership and risk aversion

Abstract

I suggest a model for two managers/owners and two assets, where the optimal allocation of ownership rights is jointly determined by the parties’ risk aversion and the specificity of their investments. The managers are motivated by both verifiable and non-contractible benefits. The most risk averse manager should own at least one of the two assets, if the risk bearing costs associated with the non-contractible benefits are low compared to the risk bearing costs associated with the verifiable benefits. There is a tendency for integration to dominate non-integration when the two managers have very different risk preferences. Third party participation can reduce the total risk bearing costs or can strengthen the incentives to invest. The results are illustrated with a numerical example. In one interpretation of the model, the two managers are seen as two companies with complementary competencies who do a joint venture.