The basic idea of incomplete contract theory is that property rights should be assigned to
the firm whose investment is most important in generating return of that asset. This is
because a firm will underinvest in an asset for which it must share the value generated by
such investment. That is to say if a firm does not wholly own an asset then it must share
any value generated by that asset with the other owner(s) of the asset. This means that a
firm will invest in that asset only up to the point where marginal cost of investment
equals the fraction of the marginal return on investment the firm can expect to recover.
Thus, the firm underinvests relative to the globally optimal level.
The hope is that a pair of firms in an IT outsourcing relation can globally maximize profit
by properly assigning property rights. Some references for the research are: (Grossman
and Hart 1986; Hart and Moore 1988; Hart and Moore 1990; Bakos and Brynjolfsson
1993; Bakos and Brynjolfsson 1993; Aghion and Tirole 1994; Brynjolfsson 1994; Bakos
and Nault 1997; Lerner and Merges 1998; Hart and Moore 1999; Maskin and Tirole
1999; Tirole 1999)
In addition to the central question, a number of sub-questions present themselves. I am
not sure if these are questions that will be answered in the thesis, but they are certainly
things to consider (and to collect data on). Of course, part of the point of the thesis is to
build the basis for a stream of research, so it is good to contemplate what the components
of that stream will be as early in the process as possible....