Sequential Investments and Options to Own

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