Abstract
Drawing upon the incomplete contract theory, this study examines the criterion of the strategic choice between joint ventures (JVs) and mergers when two firms contemplate vertical integration. Our model reaches the following conclusions: (1) some ownership provision to the acquired company after the mergers may prove to be more lucrative to the acquirer than 100% takeover; (2) given the same equity share arrangement for JVs and mergers we conclude that these two firms should choose to merge or be merged rather than JVs; (3) we derive the optimal equity share arrangement in both JVs and mergers when ownership provision is considered as a strategic means. In addition, we also compare the welfare and effort of both companies in JVs and mergers under symmetric cost structures, and find that mergers would provide greater social efficiency and welfare than 50-50 JVs when the acquirer’s equity share is between 30% and 65%. Key words: joint ventures, mergers, incomplete contract, stock ownership, corporate control
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