Ex Post Inefficiencies in the Property Rights Theory of the Firm

I develop a property rights theory of the firm to analyze the interdependence between the ownership structure of firms and the bargaining inefficiency that arises when managers have private information about the size of quasi-rents. I first show that if managers can only contract over the ownership structure they optimally choose one that minimizes (maximizes) their aggregate disagreement payoff if the minimum expected quasi-rents are large (small). I then allow the managers to contract over the ownership structure and the ex post bargaining game and show that the main results continue to hold if and only if ownership structures are required to be deterministic. Note: This paper is circulating as a working paper under the title "Information and the Optimal Ownership Structure of Firms"