International joint ventures: a common agency problem

In an international joint venture, two parent companies in two countries called the local and the foreign firm found a new enterprise or form a third player – the IJV-management or the board of directors of the IJV. The triangle structure of this particular enterprise creates a special information problem: the common agency (several principals have one agent) situation. The two parent firms contribute their expertise to the joint enterprise in order to develop a new product or production process, to get market access or to avoid risks. Since the third player acts as their agent in the IJV, both principals are interested in gaining knowledge about the effort of the IJV-management. The agent knows more about the actual costs, the production process, market potential and/or other factors of the management process. Thus, the parents offer incentives to get truthful reports about the ability or effort levels of the management by applying the revelation principle in order to disclose the hidden information or action. The paper studies the translation of the particular IJV information structure into the terms of common agency theory as a special form of the game theoretical application to a three-player mechanism design problem.