IDEAS home Printed from https://ideas.repec.org/p/hbs/wpaper/13-007.html
   My bibliography  Save this paper

Risky Business: The Impact of Property Rights on Investment and Revenue in the Film Industry

Author

Listed:
  • Venkat Kuppuswamy

    (Kenan-Flagler Business School, University of North Carolina at Chapel Hill)

  • Carliss Y. Baldwin

    (Harvard Business School, Finance Unit)

Abstract

Our paper tests a key prediction of property rights theory, specifically, that agents will respond to marginal incentives embedded in property rights when making non-contractible, revenue-enhancing investments. (Grossman and Hart, 1986; Hart and Moore, 1990). Using rich project-level data from the U.S. film industry, we investigate variation in property right allocations, investment choices, and film revenues to test the distinctive aspects of property-rights theory. Empirical tests of these key theoretical predictions have been relatively sparse due to the lack of appropriate data. The U.S. film industry deploys two distinct allocations of property rights, which differentially affect marginal returns on a particular class of investments. In many cases, films are both produced and distributed by studios that then take in the lion's share of revenue. In other cases, films are produced independently and distributed by studios under revenue sharing agreements, which give studios 30-40% of the revenue stream. Under either regime, the studio determines and pays for the allocation of scarce marketing resources. After accounting for the endogenous nature of property-right allocations, we find that studio-financed films receive superior marketing investments compared to independent films and that these investments fully mediate the positive effect of vertical integration on film revenues. As a result, this study contributes to the empirical literature on property rights by showing that both of the predicted linkages (from marginal returns to investment and from investment to revenue) exist in a single empirical setting.

Suggested Citation

  • Venkat Kuppuswamy & Carliss Y. Baldwin, 2012. "Risky Business: The Impact of Property Rights on Investment and Revenue in the Film Industry," Harvard Business School Working Papers 13-007, Harvard Business School, revised Aug 2012.
    • Handle: RePEc:hbs:wpaper:13-007
    as

    Download full text from publisher

    File URL: http://www.hbs.edu/research/pdf/13-007.pdf
    File Function: Revised version, 2012
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Anita Elberse & Jehoshua Eliashberg, 2003. "Demand and Supply Dynamics for Sequentially Released Products in International Markets: The Case of Motion Pictures," Marketing Science, INFORMS, vol. 22(3), pages 329-354.
    2. Ricard Gil & Frederic Warzynski, 2015. "Vertical Integration, Exclusivity, and Game Sales Performance in the US Video Game Industry," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 31(suppl_1), pages 143-168.
    3. Hart, Oliver & Moore, John, 1990. "Property Rights and the Nature of the Firm," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1119-1158, December.
    4. Gabriel Natividad, 2013. "Multidivisional Strategy and Investment Returns," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 22(3), pages 594-616, September.
    5. Ranjay Gulati & Paul R. Lawrence & Phanish Puranam, 2005. "Adaptation in vertical relationships: beyond incentive conflict," Strategic Management Journal, Wiley Blackwell, vol. 26(5), pages 415-440, May.
    6. David J. TEECE, 2008. "Profiting from technological innovation: Implications for integration, collaboration, licensing and public policy," World Scientific Book Chapters, in: The Transfer And Licensing Of Know-How And Intellectual Property Understanding the Multinational Enterprise in the Modern World, chapter 5, pages 67-87, World Scientific Publishing Co. Pte. Ltd..
    7. Ravid, S Abraham, 1999. "Information, Blockbusters, and Stars: A Study of the Film Industry," The Journal of Business, University of Chicago Press, vol. 72(4), pages 463-492, October.
    8. Jehoshua Eliashberg & Anita Elberse & Mark A.A.M. Leenders, 2006. "The Motion Picture Industry: Critical Issues in Practice, Current Research, and New Research Directions," Marketing Science, INFORMS, vol. 25(6), pages 638-661, 11-12.
    9. Daron Acemoglu & Philippe Aghion & Rachel Griffith & Fabrizio Zilibotti, 2010. "Vertical Integration and Technology: Theory and Evidence," Journal of the European Economic Association, MIT Press, vol. 8(5), pages 989-1033, September.
    10. Macher Jeffrey T & Richman Barak D, 2008. "Transaction Cost Economics: An Assessment of Empirical Research in the Social Sciences," Business and Politics, De Gruyter, vol. 10(1), pages 1-65, May.
    11. Jeffrey T. Macher & Christopher Boerner, 2012. "Technological development at the boundaries of the firm: a knowledge‐based examination in drug development," Strategic Management Journal, Wiley Blackwell, vol. 33(9), pages 1016-1036, September.
    12. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August.
    13. James H. Stock & Motohiro Yogo, 2002. "Testing for Weak Instruments in Linear IV Regression," NBER Technical Working Papers 0284, National Bureau of Economic Research, Inc.
    14. Kenneth S. Corts, 2001. "The Strategic Effects of Vertical Market Structure: Common Agency and Divisionalization in the US Motion Picture Industry," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 10(4), pages 509-528, December.
    15. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817.
    16. Michael D. Whinston, 2003. "On the Transaction Cost Determinants of Vertical Integration," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 19(1), pages 1-23, April.
    17. Elfenbein, Daniel W & Lerner, Josh, 2003. "Ownership and Control Rights in Internet Portal Alliances, 1995-1999," RAND Journal of Economics, The RAND Corporation, vol. 34(2), pages 356-369, Summer.
    18. Ron Adner & Rahul Kapoor, 2010. "Value creation in innovation ecosystems: how the structure of technological interdependence affects firm performance in new technology generations," Strategic Management Journal, Wiley Blackwell, vol. 31(3), pages 306-333, March.
    19. Federico Ciliberto, 2006. "Does Organizational Form Affect Investment Decisions?," Journal of Industrial Economics, Wiley Blackwell, vol. 54(1), pages 63-93, March.
    20. George Baker & Robert Gibbons & Kevin J. Murphy, 2002. "Relational Contracts and the Theory of the Firm," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(1), pages 39-84.
    21. Silke J. Forbes & Mara Lederman, 2010. "Does vertical integration affect firm performance? Evidence from the airline industry," RAND Journal of Economics, RAND Corporation, vol. 41(4), pages 765-790, December.
    22. Pol Antràs, 2003. "Firms, Contracts, and Trade Structure," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 118(4), pages 1375-1418.
    23. Macher, Jeffrey T. & Richman, Barak D., 2008. "Transaction Cost Economics: An Assessment of Empirical Research in the Social Sciences," Business and Politics, Cambridge University Press, vol. 10(1), pages 1-63, April.
    24. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 31(3), pages 129-137.
    25. Jeffrey T. Macher, 2006. "Technological Development and the Boundaries of the Firm: A Knowledge-Based Examination in Semiconductor Manufacturing," Management Science, INFORMS, vol. 52(6), pages 826-843, June.
    26. Francine Lafontaine & Margaret Slade, 2007. "Vertical Integration and Firm Boundaries: The Evidence," Journal of Economic Literature, American Economic Association, vol. 45(3), pages 629-685, September.
    27. Ricard Gil, 2009. "Revenue Sharing Distortions and Vertical Integration in the Movie Industry," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 25(2), pages 579-610, October.
    28. C. Edward Fee, 2002. "The Costs of Outside Equity Control: Evidence from Motion Picture Financing Decisions," The Journal of Business, University of Chicago Press, vol. 75(4), pages 681-712, October.
    29. Frédéric Dalsace & Michael J. Leiblein & Jeffrey J. Reuer, 2002. "Do make or buy decisions matter? The influence of organizational governance on technological performance," Post-Print hal-00457649, HAL.
    30. Chris Forman & Anne Gron, 2011. "Vertical Integration and Information Technology Investment in the Insurance Industry," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 27(1), pages 180-218.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Peters, Frank, 2018. "The business of video games is a multi-player game : Essays on governance choices and performance in a two-sided market in the cultural industries," Other publications TiSEM 886b3148-4bbb-4ea4-b666-0, Tilburg University, School of Economics and Management.
    2. Francine Lafontaine & Margaret Slade, 2007. "Vertical Integration and Firm Boundaries: The Evidence," Journal of Economic Literature, American Economic Association, vol. 45(3), pages 629-685, September.
    3. Daniel P. Miller, 2014. "Subcontracting and competitive bidding on incomplete procurement contracts," RAND Journal of Economics, RAND Corporation, vol. 45(4), pages 705-746, December.
    4. Timothy Bresnahan & Jonathan Levin, 2012. "Vertical Integration and Market Structure [The Handbook of Organizational Economics]," Introductory Chapters,, Princeton University Press.
    5. Macchiavello, Rocco & Miquel-Florensa, Josepa, 2017. "Vertical Integration and Relational Contracts: Evidence from the Costa Rica Coffee Chain," CEPR Discussion Papers 11874, C.E.P.R. Discussion Papers.
    6. Christopher Hansman & Jonas Hjort & Gianmarco León-Ciliotta & Matthieu Teachout, 2020. "Vertical Integration, Supplier Behavior, and Quality Upgrading among Exporters," Journal of Political Economy, University of Chicago Press, vol. 128(9), pages 3570-3625.
    7. Sharon Novak & Scott Stern, 2008. "How Does Outsourcing Affect Performance Dynamics? Evidence from the Automobile Industry," Management Science, INFORMS, vol. 54(12), pages 1963-1979, December.
    8. Christian A. Ruzzier, 2009. "Asset Specificity and Vertical Integration: Williamson’s Hypothesis Reconsidered," Harvard Business School Working Papers 09-119, Harvard Business School.
    9. Pol Antràs, 2014. "Grossman–Hart (1986) Goes Global: Incomplete Contracts, Property Rights, and the International Organization of Production," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 30(suppl_1), pages 118-175.
    10. Peter G. Klein, 2010. "Vertical Integration," Chapters, in: Peter G. Klein & Michael E. Sykuta (ed.), The Elgar Companion to Transaction Cost Economics, chapter 17, Edward Elgar Publishing.
    11. Committee, Nobel Prize, 2016. "Oliver Hart and Bengt Holmström: Contract Theory," Nobel Prize in Economics documents 2016-1, Nobel Prize Committee.
    12. Bragelien, Iver & Impink, Joost, 2014. "Relationship-Specificity, Bargaining Power Growth, and Firm Performance," Discussion Papers 2014/4, Norwegian School of Economics, Department of Business and Management Science.
    13. Eduard Marinov, 2016. "The 2016 Nobel Prize in Economics," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 6, pages 97-149.
    14. Sharon Novak & Scott Stern, 2009. "Complementarity Among Vertical Integration Decisions: Evidence from Automobile Product Development," Management Science, INFORMS, vol. 55(2), pages 311-332, February.
    15. Hideshi Itoh, 2006. "The Theories of International Outsourcing and Integration : A Theoretical Overview from the Perspective of Organizational Economics," Microeconomics Working Papers 21891, East Asian Bureau of Economic Research.
    16. Robert Gibbons & John Roberts, 2012. "The Handbook of Organizational Economics," Economics Books, Princeton University Press, edition 1, volume 1, number 9889.
    17. Eppinger, Peter S. & Kukharskyy, Bohdan, 2017. "Contracting institutions and firm boundaries," University of Tübingen Working Papers in Business and Economics 100, University of Tuebingen, Faculty of Economics and Social Sciences, School of Business and Economics.
    18. Christian Ruzzier & Ricard Gil, 2015. "’Make or Buy’ as Competitive Strategy: Evidence from the Spanish Local TV Industry," Working Papers 119, Universidad de San Andres, Departamento de Economia, revised Feb 2015.
    19. Ricard Gil & Christian A. Ruzzier, 2018. "The Impact of Competition on “Make-or-Buy” Decisions: Evidence from the Spanish Local TV Industry," Management Science, INFORMS, vol. 64(3), pages 1121-1135, March.
    20. Mark Casson & Nigel Wadeson, 2012. "Internationalisation Theory," Chapters, in: Michael Dietrich & Jackie Krafft (ed.), Handbook on the Economics and Theory of the Firm, chapter 15, Edward Elgar Publishing.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hbs:wpaper:13-007. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: HBS (email available below). General contact details of provider: https://edirc.repec.org/data/harbsus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.