Incomplete Contracts, Property Rights and Endogenous Outside Options

Abstract

This paper extends the framework provided by the so-called GHM approach to a context of endogenous outside options, showing how the optimality of property rights assignment might be reversed. In some cases, non-owners could over-invest in specific assets while having mere access to property rights might not prevent hold-up. Our conclusions suggest that in order to reach the desired optimality features, the design of ownership structure should take into account the dynamics of outside options.outside options, property rights allocation, hold-up problem