Efficiency out of Disorder — Contested Ownership in Incomplete Contracts

This paper studies the role of contested ownership in a situation where two players have to make a personand asset-specific investment, and when no complete contracts can be written. It compares contested ownership to the various ex ante ownership structures typically discussed in the literature (following the influential work by Grossman, Hart, and Moore). The paper shows that contested ownership mitigates the inefficiency of investments due to the incompleteness of contracts generating an exchange surplus which comes closer to the first-best surplus as compared to any other ex ante distribution of ownership. For example, if the contest is perfectly discriminatory, each player makes a transaction-specific investment as if he or she owns the asset.