Business Groups in Emerging Markets - Financial Control and Sequential Investment

29 Pages Posted: 25 Jul 2006

See all articles by Christa Hainz

Christa Hainz

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute

Date Written: July 2006

Abstract

Business groups in emerging markets perform better than unaffiliated firms. One explanation is that business groups substitute some functions of missing institutions, for example, enforcing contracts. We investigate this by setting up a model where firms within the business group are connected to each other by a vertical production structure and an internal capital market. Thus, the business group's organizational mode and the financial structure allow a self-enforcing contract to be designed. Our model of a business group shows that only sequential investments can solve the ex post moral hazard problem. We also find that firms may prefer not to integrate.

Keywords: business groups, self-enforcing contract, institutions, internal capital market

JEL Classification: G31, G32, G34, K49, L22

Suggested Citation

Hainz, Christa, Business Groups in Emerging Markets - Financial Control and Sequential Investment (July 2006). CESifo Working Paper Series No. 1763, William Davidson Institute Working Paper No. 830, Available at SSRN: https://ssrn.com/abstract=920353 or http://dx.doi.org/10.2139/ssrn.920353

Christa Hainz (Contact Author)

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute ( email )

Poschinger Str. 5
Munich, 81069
Germany

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