Joint Ventures and Stock Markets as Commitment Devices

Tridib Sahrma
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Tridib Sahrma: Centro de Investigacion Economica (CIE), Instituto Tecnologico Autonomo de Mexico (ITAM)

No 9706, Working Papers from Centro de Investigacion Economica, ITAM

Abstract: In this paper we show how short term contracts can reproduce the payoffs under optimal long term renegotiation proof contracts in the context of adverse selection. The result requires that the principal and the agent form a joint venture in period one. It also requires the existence of a competitive secondary market for equity. In particular the paper demostrates how asymmetrically informed firms can form joint ventures and use the stock market to commit to future terms of trade, when such commitment cannot be made through long term contracts.

Pages: 33 pages
Date: 1997-05
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Persistent link: https://EconPapers.repec.org/RePEc:cie:wpaper:9706

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