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Author
E.C. Perotti
Year
1992
Title
Cross-ownership as a hostage exchange to support collaboration
Journal
Managerial and Decision Economics
Volume | Issue number
13 | 1
Pages (from-to)
45-54
Document type
Article
Faculty
Faculty of Economics and Business (FEB)
Institute
Amsterdam Business School Research Institute (ABS-RI)
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.
Language
Undefined/Unknown
Permalink
http://hdl.handle.net/11245/1.419385

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