Risk Preferences and Asset Ownership Integrating Prospect Theory and Transaction Cost Economics

We integrate prospect theory into the discussion of Transaction Cost Economics (TCE) to illustrate how risk aversion may affect integration decisions. In particular, we argue that risk aversion creates incentives to acquire assets in situations where neither opportunism nor transaction-specific inve...

Full description

Saved in:
Bibliographic Details
Published inManagerial and decision economics Vol. 38; no. 2; pp. 125 - 143
Main Authors Martynov, Aleksey, Schepker, Donald J.
Format Journal Article
LanguageEnglish
Published Chichester Wiley (Variant) 01.03.2017
Wiley Periodicals Inc
Subjects
Transaction costs
Online AccessGet full text

Cover

More Information
Summary:We integrate prospect theory into the discussion of Transaction Cost Economics (TCE) to illustrate how risk aversion may affect integration decisions. In particular, we argue that risk aversion creates incentives to acquire assets in situations where neither opportunism nor transaction-specific investments are present, provided the assets in question can change in value unpredictably during their use. Our theory illustrates that risk aversion could connect opportunism, asset specificity, and uncertainty with integration decisions in the presence of incomplete contracts. Our theory complements and extends TCE by showing the role of risk aversion in integration decisions under bounded rationality and contract incompleteness.
ISSN:0143-6570
1099-1468
DOI:10.1002/mde.2746