Ex Ante Investment, Ex Post Adaptation, and Asset Ownership
Abstract: This paper introduces ex post adaptation to unanticipated changes in trade circumstances into the well-known hold-up model developed in the literature on the property rights theory (PRT). We show that this simple extension may overturn the prominent result of PRT: it may be optimal to let the party who makes no investment own an asset. Specifically, we point out that assigning the asset to the party that makes an important investment may create a trade-off between ex ante investment and ex post adaptation. Our result is consistent with other theories of the firm, such as those involving transaction cost economics and multi-task incentive problems, and provides a formal explanation as to why some firms that are successful in existing technologies fail in adopting new technologies.
