Revenue Sharing and Control Rights in Team Production: Theories and Evidence from Joint Ventures.*

This paper presents a model of the joint venture that is grounded in the stylized facts we found from a sample of 200 joint venture contracts. The model incorporates the revenue-sharing contract into the incomplete contract frameworks of Grossman-Hart-Moore Property Rights Theory and the Transaction Cost Theory of the firm, and emphasizes the impact of expropriation. Joint control can be optimal as well as unilateral control. Our econometric analysis of the revenue-sharing and control arrangements o?ers strong support to our Property-Rights-Theory motivated model with self investment but rejects that with cooperative investment. The Transaction-Cost-Theory motivated model leaves some important empirical findings unexplained. Our findings also reject some of the existing theories of joint ownership.http://deepblue.lib.umich.edu/bitstream/2027.42/39948/2/wp563.pd

How Does Privatization Work in China?

Using a comprehensive panel data set of China’s state-owned enterprises, we investigate the impacts of privatization, of different time sequences and extent of non-state ownership, on social welfare and firm performance. Attention has been focused on the sources of gain in firm performance and the long-run impacts of privatization. It is found that the privatization of China’s state-owned enterprises was achieved with limited compromise on social welfare responsibilities, and significant gain in firm performance was obtained by motivating the management and reducing agency cost at the management level.

Revenue Sharing and Control Rights in Team Production: Theories and Evidence from Joint Ventures.*

This paper presents a model of the joint venture that is grounded in the stylized facts we found from a sample of 200 joint venture contracts. The model incorporates the revenue-sharing contract into the incomplete contract frameworks of Grossman-Hart-Moore Property Rights Theory and the Transaction Cost Theory of the firm, and emphasizes the impact of expropriation. Joint control can be optimal as well as unilateral control. Our econometric analysis of the revenue-sharing and control arrangements o?ers strong support to our Property-Rights-Theory motivated model with self investment but rejects that with cooperative investment. The Transaction-Cost-Theory motivated model leaves some important empirical findings unexplained. Our findings also reject some of the existing theories of joint ownership.Joint Ventures, Control Right, Revenue-Sharing Contracts, Expropriation, Theory of the Firm

A Multi-Task Theory of the State Enterprise Reform

During transition, maintaining employment and providing a social safety net to the unemployed are important to social stability, which in turn is crucial for the productivity of the whole economy. Because independent institutions for social safety are lacking and firms with strong profit incentives have little incentives to promote social stability due to its public good nature, state-owned enterprises (SOEs) are needed to continue their role in providing social welfare. Charged with the multi-tasks of efficient production as well as social welfare provision, SOEs continue to be given low profit incentives and consequently, their financial performance continues to be poor.http://deepblue.lib.umich.edu/bitstream/2027.42/39751/3/wp367.pd

Local Protectionism and Regional Specialization: Evidence from China’s Industries

This paper uses a dynamic panel estimation method to investigate the determinants of regional specialization in China’s industries, paying particular attention to local protectionism. Less geographic concentration is found in industries where the past tax-plus-profit margins and the shares of state ownership are high, re- flecting stronger local government protection of these industries. The evidence also supports the scale-economies theory of regional specialization. Finally, the overall time trend of regional specialization of China’s industries is found to have reversed an early drop in the mid 1980s, and registered a significant increase in the later years.http://deepblue.lib.umich.edu/bitstream/2027.42/39951/3/wp565.pd

Franchising as a nexus of incentive devices for production involving brand name

We set out to explain both puzzles based on the importance of the brand name in franchising (Kaufmann and Lafontaine, 1994). The effort to develop and maintain the brand name changes over time and is difficult to verify (Hadfield, 1990), which has two implications. One is that agents who run franchise units need to be given appropriate incentives for the brand-name-maintenance effort. The other is that franchising contracts are incomplete. For incentive purposes, it is optimal to divide the agents into two groups. Those in the first group (managers of company owned units) receive a salary and focus on brand maintenance. Those in the second group (franchisees) receive a share of the revenue in their own unit and focus mainly on unit specific sales effort (Bai and Tao, 2000). However, the franchisees should also be subject to a minimum service standard that is crucial for brand name maintenance. The high-powered incentive for the franchisees to increase sales revenue implies that they have a strong tendency to divert effort from meeting the minimum standard. To discourage the franchisees from doing so, they should be subject to severe penalty when found violating the standard. We show that, to serve this purpose, it is optimal to have the franchisees make investment highly specific to their franchise companies. Specifically, the investment by the franchisee to buy physical assets (buildings, equipment, etc.) can be viewed as a performance bond for the minimum standard. If the franchisor controls the assets when the franchisee leaves the company, then the franchisor has an incentive to opportunistically accuse the franchisee of violating the standard and fire the franchisee, getting all the profits arising from the assets. If the franchisee controls the assets, such opportunistic behavior of the franchisor will not occur. Furthermore, if the assets are relationship specific so that their value is very low when detached from the brand name, then the franchisee will have strong incentive not to violate the minimum standard, fearing of being deprived the right to use the brand name in the event of violation. Overall, the plural forms of contractual and control right arrangements in franchising serve as a nexus of incentive devices for production involving brand-name-maintenance effort in an incomplete contract framework.postprintThe 2000 Taipei International Conference on Industrial Economics, Taipei, Taiwan, 15-17 June 2000