Bargaining, Bonding, and Partial Ownership

Sudipto Dasgupta and Zhigang Tao

International Economic Review, 2000, vol. 41, issue 3, 609-35

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.

Date: 2000
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