Incomplete contracts, shared ownership, and investment incentives

TLDR

A partnership of two symmetrically informed parties can each own a share of an asset. Today, parties can invest to enhance the asset’s productivity, but contracts are incomplete so only the ownership structure can be specified and may be renegotiated tomorrow. Ex post, the higher‑valued party should receive the asset, yet the analysis shows shared ownership is often optimal, sometimes giving the lower‑valued party a larger share when investments are embodied in the asset, and that joint ownership with bilateral veto power is never optimal regardless of investment type.

Abstract

Consider a partnership consisting of two symmetrically informed parties who may each own a share of an asset. It is ex post efficient that tomorrow the party with the larger valuation gets the asset. Yet, today the parties can make investments to enhance the asset's productivity. Contracts are incomplete, so today only the ownership structure can be specified, which may be renegotiated tomorrow. It turns out that shared ownership is often optimal. If the investments are embodied in the physical asset, it may be optimal that party B has a larger ownership share even when party A has a larger valuation and a better investment technology. When shared ownership is taken into account, joint ownership in the sense of bilateral veto power cannot be optimal, regardless of whether the investments are in human capital or in physical capital.