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Bargaining, Bonding, and Partial Ownership

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  • Dasgupta, Sudipto
  • Tao, Zhigang

Abstract

This article provides a theory of interfirm partial ownership. We consider a setting in which an upstream firm can make two alternative types of investment: either specific investment that only a particular downstream firm can use or general investment that any downstream firm is capable of using. When the benefits from specific and general investments are both stochastic, equity participation by the downstream firm in the upstream firm can lead to more efficient outcomes than take-or-pay contracts. The optimal ownership stake of the downstream firm is less than 50 percent under a natural assumption about relative bargaining power. Copyright 2000 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Suggested Citation

  • Dasgupta, Sudipto & Tao, Zhigang, 2000. "Bargaining, Bonding, and Partial Ownership," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(3), pages 609-635, August.
  • Handle: RePEc:ier:iecrev:v:41:y:2000:i:3:p:609-35
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    Cited by:

    1. Fiocco, Raffaele, 2016. "The strategic value of partial vertical integration," European Economic Review, Elsevier, vol. 89(C), pages 284-302.
    2. Jain, Bharat A. & Kini, Omesh & Shenoy, Jaideep, 2011. "Vertical divestitures through equity carve-outs and spin-offs: A product markets perspective," Journal of Financial Economics, Elsevier, vol. 100(3), pages 594-615, June.
    3. Subramanian, Narayanan, 2005. "The economics of intrapreneurial innovation," Journal of Economic Behavior & Organization, Elsevier, vol. 58(4), pages 487-510, December.
    4. repec:eee:indorg:v:52:y:2017:i:c:p:133-164 is not listed on IDEAS
    5. Rick Harbaugh, 2001. "Equity Stakes and Hold-up Problems," Claremont Colleges Working Papers 2001-31, Claremont Colleges.
    6. Mathews, Richmond D., 2006. "Strategic alliances, equity stakes, and entry deterrence," Journal of Financial Economics, Elsevier, vol. 80(1), pages 35-79, April.
    7. Greenlee, Patrick & Raskovich, Alexander, 2006. "Partial vertical ownership," European Economic Review, Elsevier, vol. 50(4), pages 1017-1041, May.
    8. Clayton, Matthew J. & Jorgensen, Bjorn N., 2011. "Corporate equity ownership, investment, and product market relationships," Journal of Corporate Finance, Elsevier, vol. 17(5), pages 1377-1388.

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