Efficiency out of disorder: Contested ownership in incomplete contracts

In many situations, irreconcilable disagreements between players lead to costly ownership disputes over assets-for example, in case of joint ownership. This article studies the role of such disputes in a situation where two players have to make a transaction-specific investment and when contracts are incomplete. I show that potentially contested ownership may mitigate the inefficiency of investments due to the incompleteness of contracts generating an exchange surplus that comes closer to the first-best surplus as compared to any other ex ante distribution of ownership typically discussed in the literature following the influential work by Grossman, Hart, and Moore. If the contest is an all-pay auction, each player makes a transaction-specific investment as if he or she owns the asset. This article can explain why shared ownership-as for example in equity joint ventures, family firms, start-up partnerships, and so on-is an important part of today's corporate landscape. Copyright (c) 2009, RAND.