Sequential Investments and Options to Own
Volume: Volume 29, No. 4
Issue: Winter 1998
Pages: pp. 633-653
Authors: Georg Noeldeke and Klaus Schmidt
Title: Sequential Investments and Options to Own
Abstract: Contingent ownership structures are prevalent in joint ventures. We offer an explanation based on the investment incentives provided by such an arrangement. We consider a holdup problem in which two parties make relationship-specific investments sequentially 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.
JEL Classification
Financing Policy; Capital and Ownership Structure; financial ratios; value of firm
(G320)
Asymmetric and Private Information (D820)
Intertemporal Firm Choice and Growth, Investment, or Financing (D920)
Mergers; Acquisitions; Restructuring; Voting; Proxy Contests; Corporate Governance
(G340)
Market Structure: Industrial Organization and Corporate Strategy
(6110)
Business Finance (5210)
Theory of Uncertainty and Information (0261)
Business Administration (5131)
Microeconomics Theory of Production (0223)
Microeconomics of Intertemporal Choice (0229)
Business Investment
(5220)