Incomplete contracts, joint ventures, and ownership restrictions

This article allows for both sole-ownership enterprises and joint ventures as forms of integrated production organizations in an economic environment with contract incompleteness and relationship-specificity. When joint ventures are possible, the variable profit of integrated production organizations is always higher than that of outsourcing organizations. We then explore welfare effects of ownership restrictions imposed by a developing country (the South) with the assumption of no cash constraints. We show a decline in Southern welfare and world welfare. We then assume there are cash constraints on Southern agents and show that the equity share chosen by foreign agents is higher than the efficient level, in which case some degree of ownership restriction may improve the world welfare. However, if there is no international discipline on ownership restrictions, the ownership restriction level chosen by the Southern government tends to be overacted and will deteriorate the world welfare. Copyright 2011 Oxford University Press 2010 All rights reserved, Oxford University Press.