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A Bargaining Approach to Profit Sharing in Joint Ventures

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  • Darrough, Masako N
  • Stoughton, Neal M

Abstract

Profit-sharing arrangements in joint ventures are analyzed as a Bayesian bargaining game between two parents with incomplete information about each other's cost function for inputs provided. Using the mathematics of mechanism design, this article explores the sensitivity of the bargaining agreement to the timing of private information about costs. A condition on demand and costs is derived under which the balanced budget constraint does not preclude the joint venture from achieving an ex post efficient level of production. The proposed mechanism is then extended to the second-best environment under the criteria of (1) ex ante optimality and (2) R. B. Myerson's axiomatic neutral bargaining solution. The direct revelation mechanisms are interpreted as corresponding indirect transfer-pricing mechanisms. A major result is that, in all cases, the outcome calls for equal allocation of realized joint venture net profit. Copyright 1989 by the University of Chicago.

Suggested Citation

  • Darrough, Masako N & Stoughton, Neal M, 1989. "A Bargaining Approach to Profit Sharing in Joint Ventures," The Journal of Business, University of Chicago Press, vol. 62(2), pages 237-270, April.
    • Handle: RePEc:ucp:jnlbus:v:62:y:1989:i:2:p:237-70
    DOI: 10.1086/296461
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    Cited by:

    1. Mantecon, Tomas & Liu, Ian & Gao, Fei, 2012. "Empirical evidence of the value of monitoring in joint ownership," Journal of Banking & Finance, Elsevier, vol. 36(4), pages 1045-1056.
    2. Wang, Susheng & Zhu, Tian, 2016. "Optimality of the 51:49 equity structure," Economics Letters, Elsevier, vol. 145(C), pages 270-273.
    3. Gilles Chemla & Michel A. Habib & Alexander Ljungqvist, 2007. "An Analysis of Shareholder Agreements," Journal of the European Economic Association, MIT Press, vol. 5(1), pages 93-121, March.
    4. Balkenborg, Dieter & Makris, Miltiadis, 2015. "An undominated mechanism for a class of informed principal problems with common values," Journal of Economic Theory, Elsevier, vol. 157(C), pages 918-958.
    5. Armando Gomes, "undated". "Multiple Large Shareholders in Corporate Governance," Rodney L. White Center for Financial Research Working Papers 5-99, Wharton School Rodney L. White Center for Financial Research.
    6. Stoughton, Neal M. & Zechner, Josef, 2007. "Optimal capital allocation using RAROC(TM) and EVA(R)," Journal of Financial Intermediation, Elsevier, vol. 16(3), pages 312-342, July.
    7. Litao Zhong & Sajal Lahiri, 2010. "Profit Share and Partner Choice in International Joint Ventures," Review of International Economics, Wiley Blackwell, vol. 18(3), pages 552-561, August.
    8. Mantecon, Tomas & Chatfield, Robert E., 2007. "An analysis of the disposition of assets in a joint venture," Journal of Banking & Finance, Elsevier, vol. 31(9), pages 2591-2611, September.
    9. HEGE, Ulrich & HAUSWALD, Robert, 2002. "Ownership and control in joint ventures: theory and evidence," HEC Research Papers Series 750, HEC Paris.
    10. Zhong, Litao & Lahiri, Sajal, 2009. "International joint ventures and tax competition in an integrated market," International Review of Economics & Finance, Elsevier, vol. 18(1), pages 38-44, January.
    11. Helmenstein, Christian & Voicu, Ioan, 1995. "An Exploratory Analysis of Joint Ventures' Performance in Romania," East European Series 17, Institute for Advanced Studies.
    12. Leung, W. -F., 1998. "A model of coexistence of international joint ventures and foreign wholly-owned subsidiaries," Japan and the World Economy, Elsevier, vol. 10(2), pages 233-252, April.
    13. Slovin, Myron B. & Sushka, Marie E. & Mantecon, Tomas P., 2007. "Analyzing joint ventures as corporate control activity," Journal of Banking & Finance, Elsevier, vol. 31(8), pages 2365-2382, August.
    14. Ling T. He & F.C. Neil Myer & James R. Webb, 1997. "The Wealth Effects of Domestic vs International Joint Ventures: The Case of Real Estate," Journal of Real Estate Research, American Real Estate Society, vol. 13(3), pages 349-358.

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