Pakistan Institute of Development Economics

THE PAKISTAN DEVELOPMENT REVIEW 

Property Rights Approach with in Multiple Transactions

We extend the property rights approach to multiple transactions and explain why small local firms does not merge with large multinationals. Previous theories of the property rights approach, such as the theory in Hart and Moore [1990], have not considered the effects arising in multiple transactions that do not arise in a single transaction. In multiple transactions, the asset is owned by a third party rather than by either of the parties involved in the transaction. The parties involved in the transaction, therefore, receive lower payoffs in renegotiation because the third party gets a surplus from its ownership of the asset, which is essential for the transaction. Third-party ownership worsens the hold-up problem of the transaction. In order to avoid this result, small firms should not merge with multinationals.

Takuya Nakaizumi

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