We reconsider the optimal allocation of property rights in a general model of pure adverse selection (instead of the more common pure moral hazard, such as Rajan and Zingales, QJE (1998)). One agent called the target, has an exclusive resource that may be combined with the respective individual-specific human capital of any subset S of a set of agents N. The aggregate output resulting from that coalition (with the target) depends on the physical synergies of the human capital of those in S and the business acumen of the “manager” assigned to run of the merger. Residual Control or “ownership” refers to the right to choose the merger and the manager. The design question is thus: What is the optimal allocation of ownership?
Although still an IPV setting, the model involves a multi-dimensional mechanism design. We first show that it is impossible to achieve ex-post efficiency even with a mediator, i.e. with third-party ownership. We then focus on optimal internal ownership and show that it must be the target. A clean intuition based on the savings of the informational rents (expressed in terms of multi-dimensional virtual values) is offered for the results.