“Sequential Investment, Hold-up, and Ownership Structure” by Yi Zhang
Singapore Management University
Research Institute of Economics and Management Southwestern University of Finance and Economics
We construct a sequential investment model to investigate individual firms' strategic choices of organizational forms when outsourcing their intermediate products. Our results indicate that as a result of the encouragement effect of sequential complementary investments, sequential investment alleviates the underinvestment caused by the hold-up problem. Thereafter, we analyze the impact of sequential investment on the choice of ownership structure. We show that contrary to the result of the standard property rights theory, non- integration could be optimal even if assets are strictly complementary.