Ownership and Control Rights in Internet Portal Alliances

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Presentation transcript:

Ownership and Control Rights in Internet Portal Alliances 1995-1999 Daniel W. Elfenbein and Josh Lerner Rand Journal of Economics, 2003 Fall 2018 BA 549

KEY POINTS 1 The alliance contracts of Internet portals are incomplete contracts. 2 In the portal contracts control rights differ from ownership. The division of ownership is consistent with the Grossman-Hart-Moore framework. 3 The allocation of control rights supports the Aghion and Tirole model. 4

THEORETICAL FOUNDATIONS THE THEORY OF INCOMPLETE CONTRACTS The Grossman-Hart-Moore Model The Aghion-Tirole Model Bargaining power Control rights Marginal efforts Assets EMPIRICAL SETTING 106 alliance contracts between Internet portals and other firms 1995-1999

INCOMPLETE CONTRACTS: PROPERTY RIGHTS APPROACH The Aghion-Tirole Model The Grossman-Hart-Moore (GHM) Model Residual rights of control Efficient ex-ante maximize ex-post gains Specified control rights R&D Alliance Ex-ante power with RU Ex-ante power with a Customer Same as the GHM Model Inefficient allocation may happen

INTERNET ALLIANCES IN 1990s Internet sites with a broad set of services Alliances with partner firms Highly uncertain environment Assets: servers, URLs and customer data Efforts: both parties have impact Majority of efforts were not specified in the contracts Specified control rights added into the analysis

INDEPENDENT VARIABLES EMPIRICS INDEPENDENT VARIABLES The date of the agreement The relative effort of the two parties The relative traffic on the two sites The relative financial strength Issues Non-indepenedence of the observations Signalling

DEPENDENT VARIABLE: OWNERSHIP EMPIRICS DEPENDENT VARIABLE: OWNERSHIP Time Traffic Bargaining power Insignificant Consistent with the GHM Model Significant Relative efforts

DEPENDENT VARIABLE: CONTROL EMPIRICS DEPENDENT VARIABLE: CONTROL 12 common provisions 2 types: Control rights that could be assigned to either party Control rights that limit the partner Consistent with the Aghion-Tirole Model Bargaining power Significant

CONCLUSION Empirical tests are consistent with both theoretical models of incomplete contracting. 1 2 Control rights are sensitive to bargaining power, but ownership is not. Possible reason is technological considerations. NOTE: Upwardly biased expectations (changes in bargaining power?) Dot-com Bubble in 1995-2000.