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Department of Economics, Copenhagen Business School Working Paper Series, Department of Economics, Copenhagen Business School

No 10-1998:
Temporary partnerships as an information transmission mechanism

H. Peter Møllgaard and Per Baltzer Overgaard

Abstract: Asymmetric information and fear of acquiring a 'lemon' may explain the paucity of foreign investment in emerging market economies. If investors are uncertain about the profitability of investments, intrinsically inefficient, temporary partnerships or joint ventures may serve as mechanisms through which information is transmitted. Temporary partnerships with joint in- vestments by the domestic firm and the foreign investor, together with a buy-out option to the investor, can be used to separate good and bad invest- ment prospects in equilibrium. However, non-revealing equilibria may exist. Implications for foreign direct investment are traced and briefly related to the experience of transition economies. Keywords: investment, complementary assets, partnerships, joint ventures and licensing, costly signaling JEL: D8, F2, L14, O12

Keywords: na; (follow links to similar papers)

JEL-Codes: G10; L14; O12; (follow links to similar papers)

25 pages, January 1, 1998

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