Reputation, Network Effects and the Theory of the Firm: A Renegotiation-Proof Approach

Abstract

I analyze the effect of long-term relations on the property rights theory of the firm when network or reputation effects are present. Repeated relations affect the optimal allocation of ownership even when agents are allowed to renegotiate relational contracts. Single ownership dominates joint ownership when the discount factor is very high or very low; however there exists a mid-region where other ownership structures including joint ownership become optimal. The probability of observing joint ventures does not always increase with the discount factor of agents. In industries where agents' actions affect the structure of the game, i.e. where reputation and network effects are important, renegotiation-proof relational contracts exist and joint ownership is more likely to be optimal.

Keywords: theory of the firm, relational contracts, joint ventures, optimal ownership

JEL Classification: G32, L22, L24