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Business Groups in Emerging Markets - Substitutes for Missing Institutions

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Author Info
Hainz, Christa

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Abstract

Abstract: Business groups in emerging markets perform better than unaffiliated firms. We study how business groups can substitute some functions of missing institutions, for example, enforcing contracts. In a two period model, there is no contract enforcement in the first period. The firms within the business group are connected to each other by a vertical production structure, resulting in externalities due to double marginalization, and an internal capital market. Our model derives the sequencing of investments and the credit contract offered by the headquarters that solve the ex post moral hazard problem. Thus, the business group's organizational mode and the financial structure facilitate relational contracting.

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Paper provided by University of Munich, Department of Economics in its series Discussion Papers in Economics with number 387.

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Date of creation: Jul 2004
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Handle: RePEc:lmu:muenec:387

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Related research
Keywords: Business groups; internal capital market; institutions;

Find related papers by JEL classification:
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
K49 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Other
L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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    Other versions:
  2. Raja Kali, 2002. "Contractual governance, business groups and transition," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 10(2), pages 255-272, July. [Downloadable!] (restricted)
  3. Brusco, Sandro & Panunzi, Fausto, 2000. "Reallocation of Corporate Resources and Managerial Incentives in Internal Capital Markets," CEPR Discussion Papers 2532, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  4. Stein, Jeremy C, 1997. " Internal Capital Markets and the Competition for Corporate Resources," Journal of Finance, American Finance Association, vol. 52(1), pages 111-33, March. [Downloadable!] (restricted)
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  5. Beatriz Armendáriz de Aghion & Jonathan Morduch, 2000. "Microfinance Beyond Group Lending," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 8(2), pages 401-420, July. [Downloadable!] (restricted)
  6. Kali, Raja, 1999. "Endogenous Business Networks," Journal of Law, Economics and Organization, Oxford University Press, vol. 15(3), pages 615-36, October.
  7. Khanna, Tarun, 2000. "Business groups and social welfare in emerging markets: Existing evidence and unanswered questions," European Economic Review, Elsevier, vol. 44(4-6), pages 748-761, May. [Downloadable!] (restricted)
  8. Perotti, Enrico C. & Gelfer, Stanislav, 2001. "Red barons or robber barons? Governance and investment in Russian financial-industrial groups," European Economic Review, Elsevier, vol. 45(9), pages 1601-1617, October. [Downloadable!] (restricted)
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