INCOMPLETE CONTRACTS, RISK, AND OWNERSHIP

This paper develops a model of ownership based on incomplete contracts , specific investments, and risk, and tests the model using data on in dustrial subcontracting in Mexico. The choice of ownership structure i nvolves a trade-off between minimizing holdup risk and spreading natur al risk. Concentrating ownership under one party reduces her exposure to holdup, but increases her exposure to environmental uncertainty. Us ing data on Mexican apparel subcontracting, I find evidence which supp orts the model: the share of production subcontracted is high in marke t segments where demand is highly variable and low in market segments where manufacturers make large relationship-specific investments.