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Abstract:

Theoretical Economics Paper
Reputation and Allocation of Ownership
Maija Halonen
May 1995
Paper No' TE/1995/289:
Full Paper (pdf)

Tags: ownership; reputation; allocation; one-shot game; investment costs; agents; optimal control structure.

We show that allocation of ownership matters even in a long-term relationship where problems of opportunism are less severe unless agents are very patient. Ownership structure is chosen to give the agents best incentives to cooperate. The optimal control structure of the static game restricts the gain from deviation to be the lowest but also the punishment will be minimal. The worst ownership structure of the one-shot game is good in the repeated setting because it provides the highest punishment but bad because the gain from deviation is also highest. We show that when investment costs are very elastic partnership and a hostage type solution arise in equilibrium. While when costs are moderately elastic the results of the one-shot game apply.