Outside Options, Ownership and Incentives Revisited

Paper number: 99/10

Paper date: March 1999

Year: 1999

Paper Category: Discussion Paper


David de Meza
London School of Economics and University of Exeter


Ben Lockwood
University of Warwick and CEPR


Previous work on the property rights theory of the firm suggests that in the presence of outside options, ownership may be counter productive in motivating managers. This paper shows that this conclusion depends on the assumption that a manager's outside option only depends on her own investments. In many cases, an owner has the right to continue with a project even if the team breaks up. The efforts of non owners to enhance productivity may then be devalued, but are typically not wholly lost on the project. This weakens the bargaining power of the non owner, considerably enlarging the circumstances under which outside options are consistent with ownership motivating. In addition, our analysis identifies the possibility that when the right agent owns not only do they put more effort into the enterprise, so does everyone else.

JEL Classification Nos: D23, C78
Keywords: Property rights, outside options, inside options, incentives

Corresponding Author: David de Meza, School of Business and Economics, University of Exeter, Streatham Court, Rennes Drive, Exeter, EX4 4PU, UK, tel: (44) 1392 264485, fax (44) 1392 263242, email: D.E.de-Meza@exeter.ac.uk