Tax, Incentive and Risk-Sharing Issues in the Allocation of Property Rights: The Generalized Lease-or-Buy Problems

By Mark A. Wolfson
1984| Working Paper No. 776

This study is designed to augment the buy-versus-lease literature by incorporating (1) risk-sharing motives, (2) moral hazard-related incentive problems and their mitigation, and (3) tax considerations in the choice of how to allocate an asset’s property rights. A game-theoretic framework is used to characterize the equilibrium shared ownership arrangement. Buying and leasing emerge as special cases of the analysis. Real estate investments are emphasized as an illustrative context, where it is shown that (1) the efficiency of shared home ownership contracts can be improved by using local housing price indices and (2) taxes encourage investors to bear risk, resulting in reduced asset maintenance unless the actions of the resident are directly monitored.