Sequential Investments and Options to Own

Contingent ownership structures are prevalent in joint ventures. This paper offers an explanation based on the investment incentives provided by such an arrangement. We consider a hold-up problem in which two parties make relationship-specific investments sequentially in order to generate a joint surplus in the future. In our model, the following ownership structure implements first best investments: one party owns the firm initially, while the other party has the option to buy the firm at a set price at a later date. This result is robust to the possibility of renegotiation and uncertainty.