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Bargaining, bonding, and partial ownership

Research output: Contribution to Journal/MagazineJournal articlepeer-review

<mark>Journal publication date</mark>08/2000
<mark>Journal</mark>International Economic Review
Issue number3
Number of pages27
Pages (from-to)609-635
Publication StatusPublished
<mark>Original language</mark>English


This article provides a theory of interfirm partial ownership. We consider
a setting in which an upstream firm can make two alternative types of invest- ment: 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 partic-ipation 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 down-stream firm is less than 50 percent under a natural assumption about relative bargaining power.