A Bargaining Approach to Profit Sharing in Joint Ventures

Masako N Darrough and Neal M Stoughton

The Journal of Business, 1989, vol. 62, issue 2, 237-70

Abstract: Profit-sharing arrangements in joint ventures are analyzed as a Bayesian bargaining game between two parents with incomplete information about each other's cost function for inputs provided. Using the mathematics of mechanism design, this article explores the sensitivity of the bargaining agreement to the timing of private information about costs. A condition on demand and costs is derived under which the balanced budget constraint does not preclude the joint venture from achieving an ex post efficient level of production. The proposed mechanism is then extended to the second-best environment under the criteria of (1) ex ante optimality and (2) R. B. Myerson's axiomatic neutral bargaining solution. The direct revelation mechanisms are interpreted as corresponding indirect transfer-pricing mechanisms. A major result is that, in all cases, the outcome calls for equal allocation of realized joint venture net profit. Copyright 1989 by the University of Chicago.

Date: 1989
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