Sequential Investments and Options to Own

Abstract

Contingent ownership structures are p r evalent in joint ventures.This paper o ers an explanation based on the investment incentives provided by such an arrangement.We consider a hold-up problem in which two parties make relationshipspeci c investments sequentially in order to generate a joint surplus in the future.In our model, the following ownership structure implements rst best investments: one party owns the rm initially, while the other party has the option to buy the rm at a set price a t a later date.This result is robust to the possibility of renegotiation and uncertainty.