REPUTATION AND ALLOCATION OF OWNERSHIP*

Maija Halonen

University of Bristol

Contents: Abstract 1. Introduction 2. An Example 3. The Model 4. One-Shot Game 5. Repeated Game 6. Two Investments 7. Related Literature Appendix References The Suntory Centre Suntory and Toyota International Centres for Economics and Related Disciplines London School of Economics and Political Science Discussion Paper Houghton Street No. TE/95/289 London WC2A 2AE May 1995 Tel.: 020-7955 6698 * This is chapter 2 of my LSE PhD thesis. I would like to thank Godfrey Keller, Steven Matthews, Kevin Robert, Seppo Salo, John Vickers, Iestyn Williams and especially Patrick Bolton, Oliver Hart and John Moore for helpful discussions. Any errors are mine. This paper also benefited from seminar participants at Bristol, Helsinki School of Economics, Helsinki University, LSE, Royal Holloway College, Tampere, Warwick, 1994 Econometric Society European Meeting in Masstricht and 1994 EARIE Conference in Crete. Financial support from the Academy of Finland, Foundation of Helsinki School of Economics and Yrjo Jahnson Foundation is gratefully acknowledged.

Abstract

We show that allocation of ownership matters even in a long-term relationship where problems of opportunism are less severe unless agents are very patient. Ownership structure is chosen to give the agents best incentives to cooperate. The optimal control structure of the static game restricts the gain from deviation to be the lowest but also the punishment will be minimal. The worst ownership structure of the one-shot game is good in the repeated setting, because it provides the highest punishment but bad, because the gain from deviation is also the highest. We show that when investment costs are very elastic partnership and a hostage-type solution arise in equilibrium. While when costs are moderately elastic the results of the one-shot game apply. Keywords: Ownership, reputation, allocation, one-shot game, investment costs, agents, optimal control structure. © Maija Halonen. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source.