Bargaining, Bonding, and Partial Ownership

Posted: 3 Nov 2000

See all articles by Zhigang Tao

Zhigang Tao

The University of Hong Kong - School of Business

Sudipto Dasgupta

Chinese University of Hong Kong, ABFER, CEPR, and ECGI

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.

Suggested Citation

Tao, Zhigang and Dasgupta, Sudipto, Bargaining, Bonding, and Partial Ownership. Available at SSRN: https://ssrn.com/abstract=241837

Zhigang Tao

The University of Hong Kong - School of Business ( email )

Meng Wah Complex
Pokfulam Road
Hong Kong
China
(852) 2857-8223 (Phone)
(852) 2858-5614 (Fax)

Sudipto Dasgupta (Contact Author)

Chinese University of Hong Kong, ABFER, CEPR, and ECGI ( email )

CUHK, Cheng Yu Tung Building, Room 1224
Shatin, NT
Hong Kong
Hong Kong

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