Abstract:

Motivated by the inadequacy of property rights models to explain the existence of some of the largest cooperatives in the Netherlands, this paper analyzes the effect of ownership on the dynamics of outside option and its consequences for relationship-specific investments. Taking into account the dynamic evolution of outside options, we show that contrary to the original tenet of property rights literature ownership by the party who adds less value might be optimal. Our analysis also sheds light on the effect of outside option dynamics on the human capital development. We show that incorporating the dynamics of ownership may reverse many established insights of property right models.