ON THE DESIGN OF STABLE JOINT VENTURES

An analytical model is developed to study the problem of designing sta ble joint ventures aimed at jointly developing and supplying a new tec hnology. The analysis focuses on the extent to which traditional motiv es for joint ventures like cost sharing, synergy effects or technologi cal spillovers may shape the incentives for firms to cheat on the arra ngement and hence despite larger cooperative benefits, endanger the fo rmation of a stable agreement. The cheating firm, although supplying t he contractually specified inputs to the venture, manages to keep its know-how proprietary while benefiting from the loyal partner's know-ho w through spillovers from the venture. Only if know-how can be kept su fficiently proprietary within the venture, will synergy effects stimul ate the formation of a stable joint venture, increasing the profitabil ity of cooperation while at the same time stifling the incentives to c heat. But if know-how becomes difficult to appropriate, synergy effect s may increase the incentives to cheat, resulting in no agreement at l east when both parties have perfect foresight.