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Business Groups in Emerging Markets - Substitutes for Missing Institutions

  • Hainz, Christa

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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  1. Maitreesh Ghatak & Timothy W. Guinnane, 1998. "The Economics of Lending with Joint Liability: Theory and Practice," Discussion Papers 98-16, University of Copenhagen. Department of Economics.
  2. Sandro Brusco & Fausto Panunzi, 2002. "Reallocation of Corporate Resources and Managerial Incentives in Internal Capital Markets," CESifo Working Paper Series 735, CESifo Group Munich.
  3. 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.
  4. 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.
  5. Jeremy C. Stein, 1995. "Internal Capital Markets and the Competition for Corporate Resources," NBER Working Papers 5101, National Bureau of Economic Research, Inc.
  6. 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.
  7. 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.
  8. Bolton, Patrick & Scharfstein, David S, 1990. "A Theory of Predation Based on Agency Problems in Financial Contracting," American Economic Review, American Economic Association, vol. 80(1), pages 93-106, March.
  9. Kali, Raja, 1999. "Endogenous Business Networks," Journal of Law, Economics and Organization, Oxford University Press, vol. 15(3), pages 615-36, October.
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