Working Paper: CEPR ID: DP7714
Authors: Nicoletta Berardi; Paul Seabright
Abstract: This paper investigates a hitherto unexplored rationale for firms to enter into joint ventures. We model risky projects with autocorrelated productivity shocks as creating an option value of investing over time so that later investments benefit from the information revealed by the realization of earlier investments. However, internal and external lobbies are likely to pressurize owners into paying out early revenues from such investments precisely when the autocorrelation of productivity implies they should be reinvesting them in the project. Joint ventures provide a commitment mechanism against lobbies, thereby enabling more efficient levels of investment. We present some case study evidence that this rationale for entering into joint ventures is especially relevant in the context of infrastructure projects in developing countries, though other contexts such as pharmaceuticals are also favorable to the phenomenon. We also find that Business Environment and Enterprises Performance survey data corroborate the model's prediction that organizations under conditions favorable to internal or external lobbying pressure are more likely than other firms to choose joint ventures as their corporate governance structure.
Keywords: commitment mechanism; incomplete contracts; infrastructure; joint venture; lobbying
JEL Codes: D23; F21; G32; L24; O16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| joint ventures (L24) | higher levels of reinvestment in projects (G31) |
| lobbying pressures (D72) | joint ventures (L24) |
| joint ventures (L24) | more favorable investment environment (F64) |
| lobbying pressures (D72) | profit distribution (D33) |
| joint ventures (L24) | resist lobbying pressures (D72) |
| joint ventures (L24) | investment efficiency (G14) |
| number of joint venture partners (L24) | efficiency of investments (G31) |