Leasing inputs and ownership of the firm

Leasing Inputs and Ownership of the Firm

What is a lease ?

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 .

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 .

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 .

Leasing arrangements• Capital which can be leased

come under two categories :-

• Fixed Capital(furniture, appliances,etc)

• Movable Capital(buses,trucks,cars,etc)

Real Arrangements

• Leasing arrangements are not ideal .

• They can be very specific and quasi-rent appropriated . Eg. Trains made for single purpose.

Some capital are quite specific to other assets in a firm’s production process and are leased rather than owned . Eg. Agricultural land

Eg. Different types of crops require different types of agricultural land

Food Crops Cash Crops

• 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 .

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 .

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 .