Optimal Ownership Structures in the Presence of Investment Signals

The property-rights approach to the theory of the …rm is extended by introducing distorted signals of the parties’investments. Investment incentives are then given in two ways, by allocating ownership rights and by tying pay to the signal realization. Optimal incentive strength, that is, the weight that a signal is optimally given in a wage contract, depends on two distortions, namely the distortion of the signal from the realized and from the disagreement bene…t. Under the optimal ownership structure, the deviations of both investments from their …rst-best levels are relatively small implying that the relative importance of investment matters. Further, it is shown that most of the Grossman-Hart-Moore results are not robust to an introduction of investment signals. Key words: Signal, Property rights, Integration, Distortion JEL classi…cation: D2, L2 I would like to thank Christian Grund, Andrey Ivanov, Matthias Kräkel, Timofy Mylovanov, Patrick Schmitz and Klaas Staal for helpful suggestions. Financial support by the Deutsche Forschungsgemeinschaft (DFG), SFB-TR 15 (Governance and the e¢ ciency of economic systems), is gratefully acknowledged. Oliver Gürtler, Department of Economics, BWL II, University of Bonn, Adenauerallee 24-42, D-53113 Bonn, Germany. Tel.:+49-228-739214, Fax:+49-228-739210; E-mail: [email protected]