International joint ventures are subject to moral hazard and instability. Low IPR protection and inadequate enforcement account for such problems. Principal agent models account for the moral hazard in terms of the randomness in revenue generated. Equity sharing arrangements, which have important commitment and control effects, can be expected to eliminate the moral hazard and produce royalty arrangements consistent with empirically observed stylized facts. This study demonstrates that the change in the variance is the primary channel through which the commitment and control effects affect the choice of such royalty payments.
KeywordsRisk Aversion Information Asymmetry Foreign Country Variable Cost Moral Hazard
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