1. 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

2. 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

3. 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

4. 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

5. 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

6. 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

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

8. 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

9. 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