Fairness considerations in joint venture formation
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Fairness considerations in joint venture formation Tanjim Hossain1 · Elizabeth Lyons2 · Aloysius Siow3 Received: 18 September 2018 / Revised: 10 September 2019 / Accepted: 18 September 2019 © Economic Science Association 2019
Abstract Using a series of laboratory experiments in the context of bilateral bargaining over whether and how to engage in a joint venture, this paper shows that fairness concerns result in failures to undertake profitable joint production opportunities. We find that framing an opportunity as an employment relationship rather than as a partnership significantly reduces these inefficiencies and increases subjects’ welfare. Consistent with the theoretical model developed in the paper, text analysis and a follow-up experiment demonstrate that the lower likelihood of an efficient outcome in the partnership frame is driven primarily by a concern for fairness generated by the perceived social relationship associated with partnerships, and not by differences in the economic structure, cognition, subject motivation, or changes in relative bargaining power. Keywords Firm formation · Fairness concerns · Cooperative bargaining · Organizational structure JEL Classification C92 · D91 · L14 · D83
The authors are grateful to Quinn Lewis for excellent research assistance, and to Mitch Hoffman and Charles Sprenger, and participants in seminars at the Harvard Business School, University of Toronto, Ryerson University, and the National University of Singapore for valuable feedback. We gratefully acknowledge funding support from UC San Diego Academic Senate and SSHRC Insight Grant No. 502502. Electronic supplementary material The online version of this article (https://doi.org/10.1007/s1068 3-019-09626-x) contains supplementary material, which is available to authorized users. * Elizabeth Lyons [email protected] Extended author information available on the last page of the article
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1 Introduction It is frequently assumed that in environments with full information and without contractual frictions or income effects, individuals who have a profitable opportunity to enter into a new venture will do so (Coase 1960; Hellmann 2007). In fact, there is evidence that people exit well-paying jobs to found new ventures even when expected profits are not positive (e.g. Artinger and Powell 2016). Despite the well established notion that profitable opportunities are generally pursued when individuals are aware of them and capable of doing so (Shane 2001), barriers to firm formation may restrict the capabilities of a potential entrepreneur to proceed with founding a venture. For instance, due to informational frictions, the formation of ventures may be dependent on whether a potential entrepreneur is connected to appropriate co-founders and early employees (Klepper and Sleeper 2005). In this paper, we investigate an particular barrier to firm formation; contracting difficulties under full information bargaining that arise when people are considering forming a new venture. W
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