Efficiency of Joint Enterprises with Internal Bargaining

In this paper we take a close look at those strategic incentives arising in a situation where firms share the costs and profits in a multi-firm project, and bargain for their respective (precommitted) split of cost- and profit-shares. We establish that, when each firm s effort contribution to the joint undertaking is mutually observable (which is often the case in closely collaborative operations) and hence can form basis of the contingent cost- and profit-sharing scheme, it is not the gross economic efficiency but the super-/sub-additivity of the nett returns from effort that directly affects the sustainability of a profile of firms effort contributions. The (in)efficiency result we obtain in this paper is of different nature from so-called free riding or team competition problems : the set of sustainable outcomes with bargaining over precommetted cost- and pro t-shares is generally neither a superset nor a subset of the sustainable set without bargaining.