Dynamically stable corporate joint ventures

Abstract

As markets continue to become global and firms become more international, corporate joint ventures provide firms with opportunities to rapidly create economies of scale and learn new skills and technologies that would be very difficult for them to obtain on their own. However, it is often observed that after a certain time of cooperation, some firms may gain sufficient skills and technology that they would do better by breaking up from the joint venture. This is the well-known problem of time inconsistency. In this paper, we consider a dynamic joint venture which adopts the shapley value as its profit allocation scheme. A compensation mechanism distributing payments to participating firms at each instant of time is devised to ensure the realization of the shapley value imputation throughout the venture duration. Hence time-consistency is attained, and a dynamically stable joint venture results. Extension of the analysis to a stochastic environment is also made. It is the first time that stable joint venture is analyzed both deterministically and stochastically in a dynamic environment.