Working Paper Series no. 889: Joint Ownership of Production Projects as a Commitment Device against Interest Groups

Many projects involve cooperation between partners. Sometimes this cooperation is contractual. Often, though, it takes the form of joint ownership of production projects by two or more firms. This is a puzzle: joint ownership is typically considered inefficient, because interests often diverge and strategies target different objectives among partners. So why does it happen? The answer we explore in this paper is that joint ownership may have advantages, even in absence of asset specificity or incomplete information, when it helps the parties resist pressure from internal or external interest groups to redistribute too soon the fruits of investment.

In our theoretical framework, we assume that firms have the opportunity to invest in a project that yields revenue in two stages. The results of the first stage are informative about the likely results of the second stage, due to autocorrelation in productivity shocks. However, there are interest groups that demand payouts. Lobbying may be internal (some divisions of the firm may have divergent interests) or external (there may be political pressure, or demands from trade-unions or from upstream or downstream trading partners). Internal or external interest groups may pressurize owners into paying out early revenues from such investments when the autocorrelation of productivity implies they should be reinvesting them in the project.

If the project is not wholly owned but instead jointly owned with one or more partners, giving in to lobbying pressure is more expensive and less likely to occur in our model. Indeed, payouts or more general resource allocation decisions that favor one partner’s interest groups are more difficult to make without also satisfying the demands of the interest groups of the other partner. As the perceived cost of any payout increases when an economic agent is only part-owner of the project, interest groups end up scaling down their efforts at persuasion and waste fewer resources in such activities. The main predictions are that in the presence of effective lobbying groups, joint ownership of a production project, which in practice often takes the corporate governance structure of a joint venture (JV), helps the firm to resist their pressure.

Since our theoretical framework suggests that JVs can provide a commitment device against lobbying, we would expect the corporate governance structure of JV to be more often chosen by firms that feel severe pressure either from outside the organization or from other interest groups inside it. Based on a sample of almost 20 thousand firms interviewed in the context of the European Bank of Reconstruction and Development - World Bank Business Environment and Enterprise Performance Surveys (BEEPS), in the regions of CIS, Baltic, Eastern-Central and Southern-Eastern Europe, we find descriptive and econometric evidence that firms operating in contexts where internal and external pressure is probably greater are more likely to choose a JV structure. Moreover, although JVs appear to suffer more from internal reallocation of resources and external pressure through overdue payments by trading partners, they nevertheless do not reinvest less their profit than other firms.