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Performance Verifiability and Output Sharing in Collaborative Ventures

Author

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  • Tailan Chi

    (University of Wisconsin-Milwaukee, School of Business Administration, Milwaukee, Wisconsin 53201-0742)

Abstract

This paper studies the problem of contracting between two firms when they try to exploit their complementary resources in a collaborative venture (CV), but their performance in the CV cannot be precisely verified by the other party or by a third-party arbiter. Using a mathematical model that treats performance verifiability as a continuous variable, the paper first establishes that a party whose performance cannot be perfectly verified has an incentive to shirk if it is paid only a flat fee and that this shirking problem is more severe as its performance is less verifiable. Then, the paper shows in a general setting that a contract under which each party shares a fraction of the output is superior to a contract under which one of them is paid only a flat fee when performance verifiability is sufficiently low. In addition, with some specific assumptions about the forms of the revenue and cost functions, the paper also shows that a party's share of the venture's residual output in the equilibrium is an increasing function of its productivity and a decreasing function of its opportunity cost. Finally, the numerical examples constructed in the paper suggest that a contract which combines the self-enforcing mechanism of output sharing with the third-party enforcement mechanism of arbitration generally performs better than a contract that utilizes only one of these mechanisms.

Suggested Citation

  • Tailan Chi, 1996. "Performance Verifiability and Output Sharing in Collaborative Ventures," Management Science, INFORMS, vol. 42(1), pages 93-109, January.
  • Handle: RePEc:inm:ormnsc:v:42:y:1996:i:1:p:93-109
    DOI: 10.1287/mnsc.42.1.93
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    Citations

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    Cited by:

    1. Enderwick, Peter & Buckley, Peter J., 2019. "Beyond supply and assembly relations: Collaborative innovation in global factory systems," Journal of Business Research, Elsevier, vol. 103(C), pages 547-556.
    2. Yan, Aimin & Gray, Barbara, 2001. "Negotiating control and achieving performance in international joint ventures: A conceptual model," Journal of International Management, Elsevier, vol. 7(4), pages 295-315.
    3. Sea-Jin Chang, 2019. "When to go it alone: Examining post-conversion performance of international joint ventures," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 50(6), pages 998-1020, August.
    4. Paul Almeida & Jaeyong Song & Robert M. Grant, 2002. "Are Firms Superior to Alliances and Markets? An Empirical Test of Cross-Border Knowledge Building," Organization Science, INFORMS, vol. 13(2), pages 147-161, April.
    5. Frank Stähler, 2014. "Partial ownership and cross-border mergers," Journal of Economics, Springer, vol. 111(3), pages 209-237, April.
    6. Bowe, Michael & Golesorkhi, Sougand & Yamin, Mo, 2014. "Explaining equity shares in international joint ventures: Combining the influence of asset characteristics, culture and institutional differences," Research in International Business and Finance, Elsevier, vol. 31(C), pages 212-233.
    7. Rajneesh Narula & Christian Geisler Asmussen & Tailan Chi & Sumit Kumar Kundu, 2019. "Applying and advancing internalization theory: The multinational enterprise in the twenty-first century," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 50(8), pages 1231-1252, October.

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