Private information can lead to inefficient bargaining between managers. I develop a property rights theory of the firm to analyze the optimal ownership structure that minimizes this bargaining inefficiency. I first show that a change in the ownership structure that reduces the managers' aggregate disagreement payoff increases the probability that they realize efficient trades, but also increases the cost of disagreement and can lead them to trade "too often." I then show that joint ownership is optimal if the managers' expected gains from trade are large and that either integration or nonintegration is optimal if the expected gains from trade are small.
ASJC Scopus subject areas
- Economics and Econometrics
- Organizational Behavior and Human Resource Management