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Business Groups in Emerging Markets - Financial Control and Sequential Investment

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  • Hainz, Christa

Abstract

Business groups in emerging markets perform better than unaffiliated firms. One explanation is that business groups substitute some functions of missing institutions, for example, enforcing contracts. We investigate this by setting up a model where firms within the business group are connected to each other by a vertical production structure and an internal capital market. Thus, the business group’s organizational mode and the financial structure allow a self-enforcing contract to be designed. Our model of a business group shows that only sequential investments can solve the ex post moral hazard problem. We also find that firms may prefer not to integrate.

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Bibliographic Info

Paper provided by Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich in its series Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems with number 124.

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Date of creation: Jun 2006
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Handle: RePEc:trf:wpaper:124

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Keywords: Business groups; self-enforcing contract; institutions; internal capital market;

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References

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Citations

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Cited by:
  1. Heijdra, B.J. & Ligthart, J.E., 2005. "Fiscal Policy, Monopolistic Competition and Finite Lives," Discussion Paper 2005-126, Tilburg University, Center for Economic Research.
  2. Pyle, William, 2005. "Collective action and post-communist enterprise: The economic logic of Russia’s business associations," BOFIT Discussion Papers 19/2005, Bank of Finland, Institute for Economies in Transition.
  3. William Pyle, 2005. "Collective Action and Post-Communist Enterprise: The Economic Logic of Russia’s Business Associations," William Davidson Institute Working Papers Series wp794, William Davidson Institute at the University of Michigan.
  4. Domenico Scalera & Alberto Zazzaro, 2009. "Do Inter-Firm Networks Make Access to Finance Easier? Issues and Empirical Evidence," Mo.Fi.R. Working Papers 25, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.

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