DP3418 Information and Control in Alliances and Ventures

Author(s): Wouter Dessein
Publication Date: June 2002
Keyword(s): asymmetric information, authority, biotechnology alliances, control rights, venture capital
JEL(s): D82, G24, G32, L20
Programme Areas: Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=3418

The allocation of control rights in a venture does not matter if partners have congruent preferences. This Paper develops a theory of control as a signal of congruence, and applies it to the structure of alliances between a privately informed ‘entrepreneur’ (technology firm) and an ‘investor’ (large corporation). Investor control increases when the entrepreneur is better informed or when the information that the investor receives during the course of the venture is more noisy. More investor control, however, often results in less investor interference, since the investor puts more trust in the entrepreneur upon receiving more control and, hence, has a tendency to neglect ambiguous information ex post. As a result, the cost of signaling is endogenous and the quality of the post-contracting information constrains the amount of pre-contracting information that can be revealed. Our results are in line with empirical findings on control rights in biotechnology alliances and venture capital contracts.