Hostname: page-component-7b7567c8c-lpg2g Total loading time: 0 Render date: 2026-11-15T11:18:41.037Z Has data issue: false hasContentIssue false
  • English
  • Français

Fairness considerations in joint venture formation

Published online by Cambridge University Press:  14 March 2025

Tanjim Hossain,
Elizabeth LyonsOpen the ORCID record for Elizabeth Lyons[Opens in a new window] and
Aloysius Siow
Tanjim Hossain*
Affiliation:
Institute for Management and Innovation and Rotman School of Management, University of Toronto, 105 St George St, Toronto, ON M5S 3E6, Canada
Elizabeth Lyons*
Affiliation:
School of Global Policy and Strategy, University of California, 9500 Gilman Drive, MC 0519 La Jolla, San Diego, CA 92093-0519, USA
Aloysius Siow*
Affiliation:
Department of Economics, University of Toronto, 150 St. George St, Toronto, ON M5S 3G7, Canada
*
tanjim.hossain@utoronto.ca
lizlyons@ucsd.edu
siow@chass.utoronto.ca
Get accessRights & Permissions [Opens in a new window]

Abstract

Using a series of laboratory experiments in the context of bilateral bargaining over whether and how to engage in a joint venture, this paper shows that fairness concerns result in failures to undertake profitable joint production opportunities. We find that framing an opportunity as an employment relationship rather than as a partnership significantly reduces these inefficiencies and increases subjects’ welfare. Consistent with the theoretical model developed in the paper, text analysis and a follow-up experiment demonstrate that the lower likelihood of an efficient outcome in the partnership frame is driven primarily by a concern for fairness generated by the perceived social relationship associated with partnerships, and not by differences in the economic structure, cognition, subject motivation, or changes in relative bargaining power.

Keywords

Firm formationFairness concernsCooperative bargainingOrganizational structure

JEL classification

C92: Laboratory, Group BehaviorD91: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making‡L14: Transactional Relationships • Contracts and Reputation • NetworksD83: Search • Learning • Information and Knowledge • Communication • Belief • Unawareness

Information

Type
Original Paper
Information
Experimental Economics , Volume 23 , Issue 3 , September 2020, pp. 632 - 667
Copyright
Copyright © 2019 Economic Science Association

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Article purchase

Temporarily unavailable

Footnotes

Electronic supplementary material The online version of this article (https://doi.org/10.1007/s10683-019-09626-x) contains supplementary material, which is available to authorized users.

The authors are grateful to Quinn Lewis for excellent research assistance, and to Mitch Hoffman and Charles Sprenger, and participants in seminars at the Harvard Business School, University of Toronto, Ryerson University, and the National University of Singapore for valuable feedback. We gratefully acknowledge funding support from UC San Diego Academic Senate and SSHRC Insight Grant No. 502502.

References

Andreoni, J, Brown, PM, & Vesterlund, L (2002). What makes an allocation fair? Some experimental evidence. Games and Economic Behavior, 40(1), 1–24. 10.1006/game.2001.0904CrossRefGoogle Scholar
Artinger, S, & Powell, TC (2015). Framing of incentives and effort provision. International Economic Review, 56, 917–938. 10.1111/iere.12126Google Scholar
Artinger, S, & Powell, TC (2016). Entrepreneurial failure: Statistical and psychological explanations. Strategic Management Journal, 37(6), 1047–1064. 10.1002/smj.2378CrossRefGoogle Scholar
Bao, J., & Wu, A. (2017). Equality and equity in compensation. Harvard Business School. Working Paper 17-093 (2017). Retrieved from: http://www.hbs.edu/faculty/Publication%20Files/17-093_b4f6e873-ad56-4f49-a6b8-0d7b50cd07ab.pdf.Google Scholar
Binmore, K, Shaked, A, & Sutton, J (1989). An outside option experiment. Quarterly Journal of Economics, 104(4), 753–770. 10.2307/2937866CrossRefGoogle Scholar
Bolton, GE, & Ockenfels, A (2000). ERC: A theory of equity, reciprocity, and competition. The American Economic Review, 90(1), 166–193. 10.1257/aer.90.1.166CrossRefGoogle Scholar
Breza, E, Kaur, S, & Shamdasani, Y (2017). The morale effects of pay inequality. The Quarterly Journal of Economics, 133(2), 611–663. 10.1093/qje/qjx041CrossRefGoogle Scholar
Camerer, C. F., Nave, G., & Smith, A. (2018). Dynamic unstructured bargaining with private information: Theory, experiment, and outcome prediction via machine learning. Management Science. https://doi.org/10.1287/mnsc.2017.2965.CrossRefGoogle Scholar
Charness, G, & Rabin, M (2002). Understanding social preferences with simple tests. Quarterly Journal of Economics, 117(3), 817–869. 10.1162/003355302760193904CrossRefGoogle Scholar
Coase, RH (1960). The problem of social cost. Journal of Law and Economics, 3(1), 1–44. 10.1086/466560CrossRefGoogle Scholar
de Quidt, J (2017). Your loss is my gain: A recruitment experiment with framed incentives. Journal of the European Economic Association, 16(2), 522–559. 10.1093/jeea/jvx016CrossRefGoogle Scholar
Dessein, W, & Santos, T (2006). Adaptive organizations. Journal of Political Economy, 114(5), 956–995. 10.1086/508031CrossRefGoogle Scholar
Exley, C. L., Niederle, M., & Vesterlund, L. (2016). Knowing when to ask: The cost of leaning. Technical report: National Bureau of Economic Research.CrossRefGoogle Scholar
Farrell, J, & Scotchmer, S (1988). Partnerships. The Quarterly Journal of Economics, 103(2), 279–297. 10.2307/1885113CrossRefGoogle Scholar
Fehr, E, & Schmidt, KM (1999). A theory of fairness, competition, and cooperation. The Quarterly Journal of Economics, 114(3), 817–868. 10.1162/003355399556151CrossRefGoogle Scholar
Feldman, ER, Gartenberg, C, & Wulf, J (2018). Pay inequality and corporate divestitures. Strategic Management Journal, 39(11), 2829–2858. 10.1002/smj.2933CrossRefGoogle Scholar
Fischbacher, U (2007). z-Tree: Zurich toolbox for ready-made economic experiments. Experimental Economics, 10(2), 171–178. 10.1007/s10683-006-9159-4CrossRefGoogle Scholar
Gaechter, S, & Riedl, A (2005). Moral property rights in bargaining with infeasible claims. Management Science, 51(2), 249–263. 10.1287/mnsc.1040.0311CrossRefGoogle Scholar
Galeotti, F., Poulsen, A., & Montero, M. (2018). Efficiency versus equality in bargaining. Journal of the European Economic Association. (forthcoming).Google Scholar
Gantner, A, Güth, W, & Königstein, M (2001). Equitable choices in bargaining games with joint production. Journal of Economic Behavior & Organization, 46(2), 209–225. 10.1016/S0167-2681(01)00190-1CrossRefGoogle Scholar
Gartenberg, C, & Wulf, J (2017). Pay harmony? Social comparison and performance compensation in multibusiness firms. Organization Science, 28(1), 39–55. 10.1287/orsc.2017.1109CrossRefGoogle Scholar
Gill, D, & Stone, R (2015). Desert and inequity aversion in teams. Journal of Public Economics, 123, 42–54. 10.1016/j.jpubeco.2014.12.001CrossRefGoogle Scholar
Hellmann, T., & Wasserman, N. (2016). The first deal: The division of founder equity in new ventures. Management Science.Google Scholar
Hellmann, T (2007). When do employees become entrepreneurs?. Management Science, 53(6), 919–933. 10.1287/mnsc.1060.0648CrossRefGoogle Scholar
Hjort, J (2014). Ethnic divisions and production in firms. The Quarterly Journal of Economics, 129(4), 1899–1946. 10.1093/qje/qju028CrossRefGoogle Scholar
Hoffman, E, & Spitzer, ML (1985). Entitlements, rights, and fairness: An experimental examination of subjects’ concepts of distributive justice. The Journal of Legal Studies, 14(2), 259–297. 10.1086/467773CrossRefGoogle Scholar
Hong, F, Hossain, T, & List, JA (2015). Framing manipulations in contests: a natural field experiment. Journal of Economic Behavior & Organization, 118, 372–382. 10.1016/j.jebo.2015.02.014CrossRefGoogle Scholar
Hossain, T, & List, JA (2012). The behavioralist visits the factory: Increasing productivity using simple framing manipulations. Management Science, 58(12), 2151–2167. 10.1287/mnsc.1120.1544CrossRefGoogle Scholar
Hossain, T, List, JA, & Li, KK (2014). Moral property rights in bargaining with infeasible claims. Management Science, 60(5), 1148–1160. 10.1287/mnsc.2013.1807CrossRefGoogle Scholar
Huang, J., & Low, C. (2018). The myth of the male negotiator: Gender’s effect on negotiation strategies and outcomes. Technical Report, University of Pennsylvania.Google Scholar
Isoni, A, Poulsen, A, Sugden, R, & Tsutsui, K (2014). Efficiency, equality, and labeling: An experimental investigation of focal points in explicit bargaining. The American Economic Review, 104(10), 3256–3287. 10.1257/aer.104.10.3256CrossRefGoogle Scholar
Kagan, E., Lovejoy, W. S., & Leider, S. (2017). Designing incentives in startup teams: Form and timing of equity contracting. Technical Report, University of Michigan.CrossRefGoogle Scholar
Kagel, JH, Kim, C, & Moser, D (1996). Fairness in ultimatum games with asymmetric information and asymmetric payoffs. Games and Economic Behavior, 13(1), 100–110. 10.1006/game.1996.0026CrossRefGoogle Scholar
Kahneman, D, Knetsch, JL, & Thaler, RH (1986). Fairness and the assumptions of economics. Journal of Business, 59, S285–S300. 10.1086/296367CrossRefGoogle Scholar
Klepper, S, & Sleeper, S (2005). Entry by spinoffs. Management Science, 51(8), 1291–1306. 10.1287/mnsc.1050.0411CrossRefGoogle Scholar
Knez, M, & Camerer, C (1994). Creating expectational assets in the laboratory: Coordination in weakest-link games. Strategic Management Journal, 15(S1), 101–119. 10.1002/smj.4250150908CrossRefGoogle Scholar
Kornelis, C. (2017). A venture capitalist talks about her best and worst investments. Wall Street Journal. (Online).Google Scholar
Luhan, W., Poulsen, O., & Roos, M. (2013). Unstructured bargaining over an endogenously produced surplus and fairness ideals: An experiment. Technical Report, University of East Anglia.CrossRefGoogle Scholar
Lyons, E (2017). Team production in international labor markets: Experimental evidence from the field. American Economic Journal: Applied Economics, 9, 70–104.Google Scholar
Nash, JF Jr (1950). The bargaining problem. Econometrica: Journal of the Econometric Society, 18, 155–162. 10.2307/1907266CrossRefGoogle Scholar
Rege, M, & Telle, K (2004). The impact of social approval and framing on cooperation in public good situations. Journal of Public Economics, 88, 1625–1644. 10.1016/S0047-2727(03)00021-5CrossRefGoogle Scholar
Rinaudo, EK, & Rosqig, J (2016). Negotiating a better joint venture, New York: Strategy & Corporate Finance.Google Scholar
Roth, AE, & Murnighan, JK (1982). The role of information in bargaining: An experimental study. Econometrica, 50(5), 1123–1142. 10.2307/1911866CrossRefGoogle Scholar
Shane, S (2001). Technological opportunities and new firm creation. Management Science, 47(2), 205–220. 10.1287/mnsc.47.2.205.9837CrossRefGoogle Scholar
Shaw, K. L., & Sørensen, A. (2017). The productivity advantage of serial entrepreneurs. Technical Report: National Bureau of Economic Research.CrossRefGoogle Scholar
Sonnemans, J, Schram, A, & Offerman, T (1998). Public good provision and public bad prevention: The effect of framing. Journal of Economic Behavior and Organization, 34, 143–161. 10.1016/S0167-2681(97)00042-5CrossRefGoogle Scholar
Starmans, C, Sheskin, M, & Bloom, P (2017). Why people prefer unequal societies. Nature Human Behaviour, 1, 0082 10.1038/s41562-017-0082CrossRefGoogle Scholar
Supplementary material: File

Hossain et al. supplementary material

Web Appendix
Download Hossain et al. supplementary material(File)
File 247.3 KB