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Information and Control in Alliances and Ventures

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  • Dessein, Wouter

Abstract

The allocation of control rights in a venture does not matter if partners have congruent preferences. This Paper develops a theory of control as a signal of congruence, and applies it to the structure of alliances between a privately informed ‘entrepreneur’ (technology firm) and an ‘investor’ (large corporation). Investor control increases when the entrepreneur is better informed or when the information that the investor receives during the course of the venture is more noisy. More investor control, however, often results in less investor interference, since the investor puts more trust in the entrepreneur upon receiving more control and, hence, has a tendency to neglect ambiguous information ex post. As a result, the cost of signaling is endogenous and the quality of the post-contracting information constrains the amount of pre-contracting information that can be revealed. Our results are in line with empirical findings on control rights in biotechnology alliances and venture capital contracts.

Suggested Citation

  • Dessein, Wouter, 2002. "Information and Control in Alliances and Ventures," CEPR Discussion Papers 3418, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:3418
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    References listed on IDEAS

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    More about this item

    Keywords

    asymmetric information; authority; biotechnology alliances; control rights; venture capital;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General

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