Does Asset Ownership Always Motivate Managers? The Property Rights Theory of the Firm with Alternating - Offers Bargaining

Paper number: 97/01

Paper date: November 1996

Year: 1997

Paper Category: Discussion Paper


David de Meza
Ben Lockwood*

University of Exeter and CEPR


This paper studies the Hart-Grossmn-Moore property rights approach to the theory of the firm, under the alternative assumption that bargaining over gains from trade is modelled strategically, rather than axiomatically. With strategic bargaining, the disagreement payoffs (payoffs to the two managers if they do not trade with each other) affect the managers' agreement payoffs, and hence the incentive to invest, very differently than in the axiomatic case. A key result is that extra asset ownership may decrease incentives to invest. Sufficient conditions afor intgrateion and non-integration to be optimal that have been developed for the axiomatic case are shown not to apply to the strategic case. On the contrary, type i  integration (giving all the assets to manager i ) is shown often to be desireable if motivation manager i ≠ j is particlularly important. Also, in contrast to the axiomatic case, no-trade prices have a role to play in improving efficience of investment.

First version: June 1996
This version: November 1996

JEL Classification Nos: D20, D23, L22
Keywords:Theory of the firm, bargaining, transaction costs

Corresponding Author: Ben Lockwood, Department of Economics, University of Exeter, Amory Building, Rennes Drive, Exeter, EX4 4RJ,Great Britain, tel:(44) 1392 263219, fax: (44) 1392 263242, email: