Team Production, Sequential Investments, and Stochastic Payoffs

This paper investigates a team production problem where two parties invest sequentially to generate a joint surplus. We find that the first best can be implemented even if the investment return is highly uncertain. The optimal contract entails a basic dichotomy: it is a simple option contract if inv...

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Veröffentlicht in:Journal of institutional and theoretical economics 2001-09, Vol.157 (3), p.430-442
1. Verfasser: Lülfesmann, Christoph
Format: Artikel
Sprache:eng
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Zusammenfassung:This paper investigates a team production problem where two parties invest sequentially to generate a joint surplus. We find that the first best can be implemented even if the investment return is highly uncertain. The optimal contract entails a basic dichotomy: it is a simple option contract if investments of both parties are substitutive, and a linear incentive contract if they are complementary. These arrangements can be interpreted in terms of asset ownership, and renegotiation arises in equilibrium after the first agent has invested.
ISSN:0932-4569
DOI:10.1628/0932456013621288