Leasing and Firm-specific assets
Leasing separates the rights to the cash flows over the life of the lease from rights to the salvage value of the assets. Thus, leasing produces incentives for:
Example of opportunistic behavior at lease renewal:
Suppose that, as part of a new project, your company needs
a building (with unique features) with a 20 year useful life. Further,
suppose that you decide that rather than building the building yourself,
you're going to contract with someone else who will build the building
and then lease it to you. The building has the following values (as a function
of time):
|
Time |
|||
|
0 |
10 years |
20 years |
|
| General Value |
30 |
15 |
0 |
| Firm-specific value |
20 |
10 |
0 |
| Total value |
50 |
25 |
0 |
Suppose further that we negotiate a 10-year lease (why only 10 years?). What happens at the end of the lease?