Abstract
With the help of a theoretical model, we analyze the relation between rent sharing in an international equity joint venture (EJV) and local public goods provision. In our setting, the local government faces a commitment problem to provide public services ex post to the set-up of the firm. We show that, to overcome such a dual agency problem, the multinational enterprise leaves more rents to the local partner than in the first-best to provide stronger incentives for local public investment. We test the trade-off between local public goods and ownership shares across Chinese provinces to find support for our mechanism.
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