[Link to paper]

Abstract: We consider the canonical property rights theory of firms where assets are non-excludable (e.g., technological know-how). When contracts are incomplete, residual property rights over the assets change the nature of the hold-up problem and thus impact ex-ante incentives. In sharp contrast to excludable assets, even under almost perfect intellectual property rights, when the assets are complementary, a strategic alliance provides betterjoint incentives than acquisition. This contrasting result arises from the fact that under the strategic alliance, each firm can infringe and use the other’s technology in the event of a disagreement, which increases their ex-ante incentives to invest.