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faculty: "FEB" and publication year: "1992"
| Author||E.C. Perotti|
|Title||Cross-ownership as a hostage exchange to support collaboration|
|Journal||Managerial and Decision Economics|
|Faculty||Faculty of Economics and Business|
|Institute/dept.||FEB: Amsterdam Business School Research Institute (ABS-RI)|
|Keywords||firms; ownership rights; reallocation|
|Abstract||The impossibility of writing complete contracts causes loss of profitable transactions among firms, since their managers cannot ex ante bind themselves to future actions. The author shows how a reallocation of ownership rights into a network of mutual shareholdings among a coalition of firms produces an efficient enforcement mechanism. Cooperation is achieved by exchanging control rights until a mutual threat of capture of control is established. By making control over their firms vulnerable to a takeover by the other members of the coalition, each firm is able to make a credible commitment to future efficient actions. In equilibrium no punishment is administered, so that the arrangement achieves the outcome under complete contracts. More generally, it is proved that a mutual hostage exchange may dominate the threat of loss of reputation as an enforcement mechanism.|
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