When will capitalists meet their match? The property rights theory of the firm with endogenous timing*

Paper number: 98/07

Paper date: First version: January 1998 This version: July 1998

Year: 1998

Paper Category: Discussion Paper


David de Meza
University of Exeter

Ben Lockwood
University of Exeter


The standard property rights theory of the firm assumes asset ownership is decided by negotiation between managers prior to their choice of unverifiable investment. This paper endogenises the event sequence in a matching model of market equilibrium. Equilibria in which agents invest (in human capital) and buy assets prior to matching are shown to exist and so are immune to Maskin and Tirole's recent criticism that the simplest of ownership arrangements can be improved upon. The model preserves the central feature of the original property rights theory, namely that ownership of physical assets affects the incentive to invest. However, in this setting ownership creates rent shifting and search advantages, so new results emerge. For example, there is a tendency, but not a necessity, for the agents with the highest marginal productivity of investment to own. As for the form of integration, multiple Pareto rankable equilibria may arise.

JEL Classification Nos: D23
Keywords: Property rights; integration; asset ownership

Corresponding Author: David de Meza, Department of 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


* We would like to thank John Moore, Abhinay Muthoo, Ed Nosal, Daniel Seidmann and seminar participants at LSE, St Andrews and Southampton for very helpful comments on an earlier version.