Leasing inputs and ownership of the firm
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Transcript of Leasing inputs and ownership of the firm
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Leasing Inputs and Ownership of the Firm
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What is a lease ?
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Lease
A lease is a contract by which one party conveys land , property , services , etc. to another party for a specified time , usually in return for a periodic payment .
• Lessor – refers to the party giving lease .• Lessee – refers to the party taking lease .
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Opportunism and Rents
• Opportunism occurs in the form of appropriation of quasi-rents
• After an investment is made , the presence of appropriable quasi-rents leads to risk of opportunism .
• What are “Quasi-rents”?• The value of the asset above the next best use .
• What are “Appropriable Quasi-rents”(AQR)?• The portion of quasi-rents in excess of an asset’s value to the next highest-valuing
user .
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The Premise
According to research , it is found that leases are less common for assets with specialized quasi-rent that is appropriated by a lessor or lessee .
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Leasing arrangements• Capital which can be leased
come under two categories :-
• Fixed Capital(furniture, appliances,etc)
• Movable Capital(buses,trucks,cars,etc)
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Real Arrangements
• Leasing arrangements are not ideal .
• They can be very specific and quasi-rent appropriated . Eg. Trains made for single purpose.
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Some capital are quite specific to other assets in a firm’s production process and are leased rather than owned . Eg. Agricultural land
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Eg. Different types of crops require different types of agricultural land
Food Crops Cash Crops
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• Land rental contracts rather than vertical integration can be used to avoid opportunistic behavior.
• In this case, the landowner cannot pull out the asset, or reduce the quality of the asset during litigation process .
• Irrespective of the fact what type of crop is grown , most of the time the land is rented for commercial purposes .
Hence, we do observe that highly specific investments are made by firms .Eg. Trees , buildings , etc. Post-Contractual threats are not possible .
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Brand-name capital• The most specific asset owned by a firm is its trade name.• It is taken under lease by another lesser known firm to gain
popularity .i.e. Collaborations• Many a times , the lesser known firms is “extremely hesitant”
to make any investment as it would be in the goodwill of the former firm .
• Now, quasi-rents can be appropriated by the leasing company through increase in the rental fee saying that the brand value has increased .
• A franchisee is basically a renter of the brand name . • It usually shows a relationship closer to vertical integration
than to the standard contract made .
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Conclusion
• The owners of the firm are the major capitalists even if any kind of opportunistic situation arises .
• We can also conclude that the generalized capital is usually rented rather than specific capital . This lowers the chances of opportunism .