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

The lease-versus-buy question has captured the attention of accountants and financial economists for many years.1 The analyses to date have adopted a traditional neoclassical perspective: markets are complete, information is symmetric among agents, and contracts are costlessly enforceable. Alternatives are compared on the basis of their future cash flows. When taxes are factored into the analysis, they are typically shown to have a first-order effect on the decision. Miller and Upton (1976) represent the best work in the area to date, although they discuss some ways in which their analysis is restrictive. I wish to focus on their assumption that future maintenance costs and asset values are the same whether the asset is leased or owned: