The Strategy Behind the Organizational Game: A Comparison between the Joint Venture Negotiation and the Venture Capital Investment Negotiation
30 Pages Posted: 10 Jul 2015
Date Written: July 9, 2015
Joint ventures and venture companies present examples of the incomplete contract for economists and the relational contract for legal scholars. Although they have different practical settings, they share the issue of how parties manage the incentive for cooperation. The parties’ ultimate goal is to achieve a situation where the parties can, reciprocally, monitor each other’s promise to cooperate and, at the same time, not distort the fellow party’s incentive to cooperate. They seek to create an optimal risk allocation by contract. Rational parties should be expected to combine sanction-supported and incentive-supported monitoring devices in a way that minimizes the risks of uncooperative behavior by the parties.
There are two different types of risk. One concerns squeeze-out and the other concerns uncooperative behavior. Both will distort the incentive to cooperate. Therefore, each party must consider not only how to reduce the risk she faces, but also how to reduce the risk faced by her fellow party. Jointly optimizing the risk allocation maximizes the chances of successfully forming a contract and thereby generating the hoped-for synergy. The degree to which the risk can be reduced by contingent contracts, ex ante bargaining power and reputation is fixed before the game starts. These are essentially characteristics the parties bring to the table. Therefore, the game is about how to use equity sharing and monitoring contracts to generate cooperation.
Keywords: incomplete contract, relational contract, joint venture, venture company, venture capital
JEL Classification: D8
Suggested Citation: Suggested Citation