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Joint venture instability and monitoring

Joint venture instability and monitoring Purpose – The purpose of this paper is to build a theory of joint venture formation and instability based on synergy and monitoring. Design/methodology/approach – This problem is formulated as a dynamic game and solved using the notion of subgame perfect Nash equilibrium. Findings – It was found that monitoring problems may prevent the joint venture from forming at all. Moreover, joint venture formation usually involves over‐monitoring, and ex post could involve cheating by one, or both the firms. Faced with the possibility of over‐monitoring, firms may choose to under‐invest in improving the input quality. The paper develops some testable implications of this theory. Originality/value – The contribution of this paper is both methodological, as well as in terms of generation of new insight. It provides a framework that allows one to analyze issues like both sided moral hazard, as well as monitoring in joint ventures. New insights are that monitoring issues can take several forms including over‐ and under‐monitoring by partner firms, and, there is a linkage between such monitoring problems and joint venture instability. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Indian Growth and Development Review Emerald Publishing

Joint venture instability and monitoring

Indian Growth and Development Review , Volume 2 (2): 15 – Sep 25, 2009

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Publisher
Emerald Publishing
Copyright
Copyright © 2009 Emerald Group Publishing Limited. All rights reserved.
ISSN
1753-8254
DOI
10.1108/17538250910992559
Publisher site
See Article on Publisher Site

Abstract

Purpose – The purpose of this paper is to build a theory of joint venture formation and instability based on synergy and monitoring. Design/methodology/approach – This problem is formulated as a dynamic game and solved using the notion of subgame perfect Nash equilibrium. Findings – It was found that monitoring problems may prevent the joint venture from forming at all. Moreover, joint venture formation usually involves over‐monitoring, and ex post could involve cheating by one, or both the firms. Faced with the possibility of over‐monitoring, firms may choose to under‐invest in improving the input quality. The paper develops some testable implications of this theory. Originality/value – The contribution of this paper is both methodological, as well as in terms of generation of new insight. It provides a framework that allows one to analyze issues like both sided moral hazard, as well as monitoring in joint ventures. New insights are that monitoring issues can take several forms including over‐ and under‐monitoring by partner firms, and, there is a linkage between such monitoring problems and joint venture instability.

Journal

Indian Growth and Development ReviewEmerald Publishing

Published: Sep 25, 2009

Keywords: Joint ventures; Performance monitoring; Venture capital

References