Incomplete Contracts, Property Rights and Endogenous Outside Options

This paper extends the framework provided by the so-called GHM approach to a context of endogenous outside options, showing how the optimality of property rights assignment might be reversed. In some cases, non-owners could over-invest in specific assets while having mere access to property rights might not prevent hold-up. Our conclusions suggest that in order to reach the desired optimality features, the design of ownership structure should take into account the dynamics of outside options.